Sweet Diversity: Colonial Goods and the Rise of European Living
Standards after 1492*
University of Pennsylvania – The
UPF and CREI, Barcelona
Abstract: Did living standards stagnate before the Industrial Revolution? Traditional
real-wage indices typically show broadly constant living standards before 1800. In
this paper, we show that living standards rose substantially, but surreptitiously
because of the growing availability of new goods. Colonial luxuries such as tea,
coffee, and sugar transformed European diets after the discovery of America and the
rounding of the Cape of Good Hope. These goods became household items in many
countries by the end of the 18th century. We use the Greenwood-Kopecky (2009)
method to calculate welfare gains based on data about price changes and the rate of
adoption of new colonial goods. Our results suggest that by 1850, the average
Englishman would have been willing to forego 15% or more of his income in order
to maintain access to sugar and tea alone. These findings are robust to a wide range
of alternative assumptions, data series, and valuation methods.
JEL: D12, D60, F10, N33
Keywords: Economics of New Goods, Age of Discovery, Consumption, Early
Modern Europe, Living Standards.
* Angus Deaton inspired the authors to work on the topic. We thank Karen Kopecky for help with the
estimation procedure, Joel Mokyr and Emily Oster for feedback and advice, and Ryan Wang for
outstanding research assistance. Seminar audiences at Chicago, Northwestern University and UPF
provided helpful feedback. We thank Chiaki Moriguchi, Albert Carreras, and Jeremy Greenwood for
By 1800, Europeans could see the Age of Discovery’s impact everywhere. Spices
from Asia added flavor to meals; tomatoes transformed Mediterranean diets; and
potatoes provided a new and cheap source of calories. Silver originally imported from
the Americas was used for coins, serving as a medium of exchange for purchases all
over the continent. Salted cod from Newfoundland arrived on European tables by the
boatload. European fleets and armies fought each other in the furthest corners of the
earth in a struggle for global supremacy. Many scholars thus concluded that
globalization began in 1492 (Bentley 1999).
At the same time, the Age of Discovery apparently did not affect European
living standards, according to the dominant view in the literature. Profits from trade
with the Americas were far too small to influence the transition to self-sustaining
growth (O'Brien 1982, Engerman 1972), and overseas trade did not change factor
prices decisively before the 1830s (O’Rourke and Williamson 2002). 1 The world
economy remained poorly integrated until 1800 (Menard 1991). Nunn and Qian
(2008) conclude that the introduction of the potato increased agricultural productivity
and lead to higher urbanization rates. They do not argue that its introduction improved
living standards.2 The supply of raw materials from the New World was also
unimportant (Clark, O’Rourke, and Taylor 2008). Thus, Europeans lived none the
better as a result of the discoveries.
In this paper, we argue that the New World improved European living
standards directly and importantly through gains from new goods. Global trade after
1500 mattered not because the quantities involved were large, but because of the
nature of the goods traded. The discoveries made life better by offering access to
sugar, tea, chocolate, tobacco, and coffee. Aggregate consumption of these colonial
luxuries grew rapidly during the early modern period. Starting either from zero (for
tea, tobacco, and coffee) or from very low levels of consumption (sugar), English
imports per head surged to 23 pounds of sugar, almost 2 pounds of tea, 1 pound of
tobacco, and 0.1 pound of coffee by 1804-06.3 The rise of hot, sweetened beverages
transformed meals and forms of social interaction (Braudel 1988, Cowan 2005).
1 One exception is Acemoglu, Johnson, and Robinson (2005), who emphasize the indirect
consequences of profits from Atlantic trade, leading to greater constraints on the executive in Europe.
2 Potato consumption may not have improved the quality of life by much – consumers remained
sceptical of its appeal for a long time, and only ate it when no other source of calories was available
Breakfast changed beyond all recognition. Taking a hot, caffeinated drink in company
became an established form of social interaction.
Gains in consumer welfare from the arrival of new overseas goods have
largely been ignored. This is because long run changes in living standards have
mainly been explored through real wage indices using an unchanging consumption
basket.4 Focusing on England from 1600 to 1850, we use detailed historical data on
the price and consumption of increasingly affordable colonial goods to estimate
welfare gains from their introduction. To put a value on tea, sugar, and coffee in early
modern consumption baskets, we use standard economic techniques that have been
developed for analysing the utility gains of new products, from Apple Cinnamon
Cheerios to minivans and computers.5 We begin with an examination of historical
data on prices and consumption shares of new goods. Adopting a model for the value
of new goods (Greenwood and Kopecky 2009), we derive welfare gains from a
calibration exercise. The results suggest that by 1850, Englishmen’s welfare had
increased by at least 15 percent as a result of the availability of these goods alone.
Other colonial luxuries such as chocolate, spices, and tobacco probably increased
consumer welfare even more. These findings provide further evidence for the welfare-
enhancing effects of trade arising from greater variety, as highlighted recently by
Broda and Weinstein (2006).6
Contemporaries noticed how important new colonial luxuries were for rich
and poor. In 1797, Sir Frederick Eden described how “in the South of England, the
poorest labourers are habituated to the unvarying meal of dry bread and cheese…: and
in those families, whose finances do not allow them the indulgence of malt liquor, the
deleterious produce of China [tea] constitutes their most usual and general beverage.
[…] In poor families, tea is not only the usual beverage in the morning and evening,
but is generally drank [sic] in large quantities even at dinner.” (Eden 1797). During
the 1790s, a period of unusually high prices and severe downward pressure on lower-
class living standards, as much as seven percent of household income—and roughly
3 Mokyr (1988).
4 Phelps-Brown and Hopkins (1981), Allen (2001). Clark (2005) uses a changing consumption basket
but new goods such as tea are added at a late stage of adoption.
5 Hausman (1996); Bresnahan (1996); Greenwood and Kopecky (2007); Petrin (2002).
6 They recently investigated the issue empirically, and concluded that between 1970 and 2000, variety
growth alone added 3 percent to US real income. Feenstra (1994) and Romer (1994) had earlier
suggested that trade liberalizations may be welfare enhancing because they raise the range of goods
10% of a household’s food budget—was spent on tea, coffee, sugar and treacle by
poor, working-class households.7 This illustrates the high value assigned to these new
commodities, despite economic stress.
Incorporating the value of variety in welfare analysis has a long tradition in
economics (Hotelling 1929, Lancaster 1975). In models of consumer choice in the
Dixit and Stiglitz (1977) and Spence (1976) tradition, variety adds directly to
consumer welfare. Models of the Dixit-Stiglitz-Spence type are widely used in
international trade, macroeconomics, and economic geography. However, the
majority of papers examining living standards over the long run focus on an
unchanging basket of goods (Allen 2001, Phelps-Brown and Hopkins 1981). This
shortcoming is likely to be problematic when consumption habits change
dramatically. If expanded choice was one of the New World’s main contributions to
living standards in the Old, standard measures of purchasing power will fail to capture
the true change in welfare. By the time of the Industrial Revolution already, diets had
been transformed by the arrival of new goods and the declining costs of once
exclusive luxuries. As a result, we argue, overseas expansion had a markedly larger
impact on European living standards than previously thought.9
Our findings contribute to the literature examining the value of increased
variety and of new goods. Because the calculation of welfare gains from new goods is
not straightforward, a variety of methods have been used and applied in recent
years.10 Some follow the work by Hausman (1996) who estimated that the
introduction of Apple-Cinnamon Cheerios increased welfare by the equivalent of
0.002% of 1992 consumption expenditure.11 More recently, scholars have estimated
gains from the introduction of the minivan (Petrin 2002), online booksellers
(Brynjolfsson et al. 2003), the internet (Goolsbee and Klenow 2006), and satellite TV
7 Feinstein 1998, table 1. Sugar and treacle absorbed 7%, and tea and coffee another 3%. Horrell
(1996) gives a slightly lower figure for working-class households in the 1790s (6.2% of total
9 O’Rourke and Williamson (2002) argue that “the only irrefutable evidence that globalisation is taking
place is a decline in the international dispersion of commodity prices or what might be called
commodity price convergence”. We contend that for globalization to matter, global trade should affect
living standards significantly. It can do so in one of two ways – through changes in quantities (with an
associated change in prices), or through the value of variety.
10 See Bresnahan and Gordon (1996).
11 Cf. the comment by Bresnahan (1997).
(Goolsbee and Petrin 2004). These methods typically rely on household level data for
adoption rates and price variation across consumers. Data requirements are exacting.
The same is true of the method used by Broda and Weinstein (2006), who show how
expanding variety as a result of more trade after 1970 raised US living standards.
Greenwood and Kopecky (2009) introduce a method that makes less stringent
demands of the data. Their approach is more macroeconomic, and requires aggregate
data on prices and take-up rates of a new consumption item. For working with
historical data, this is an advantage. That is why we use their method. Data on the
characteristics of consumers, as well as take-up rates, as required for analysis in the
style of Berry et al. (1995), is not readily available in our setting. In particular, panel
data on consumption patterns is conspicuous by its absence.12 Greenwood and
Kopecky use a modified model of consumer demand where initial marginal utility of
new good consumption is bounded, allowing gains in consumer surplus to be
calculated. Increases in welfare are calculated as moving from an initial state with an
infinite new good price to a state with observed prices and consumption. The authors
find welfare gains from the introduction of personal computers up to 4% of
Other related literature includes papers in unified growth, as well as papers on
the historical significance of 1492. Adam Smith called the discovery of America and
Vasco da Gama’s rounding of the Cape of Good Hope “the two most important events
in recorded history.” Scholars like Bentley (1999) and Frank (1998) agreed with the
proposition, arguing that a worldwide trading system emerged quickly. Wallerstein
(1974) concluded that a Europe-centric mode of capitalist production emerged from
the 16th century onwards. These papers are at variance with contributions in the
economic history literature arguing that the overall impact of the discoveries as
Unified growth papers such as Kremer (1993), Galor and Weil (2000), Jones
(2001), and Hansen and Prescott (2002) emphasize the transition from millennia of
stagnation to rapid growth. That a period of gradual acceleration preceded “take-off”
is central to the model in Galor and Moav (2002), and has been explored in terms of
implications for the cross-section of economic growth (Voigtlaender and Voth 2006).
12 For some years, there is some scattered data on cross-sectional consumption, at least for some of our
goods. Yet the principal source of variation is over time. Here, data available on consumer
characteristics vary over time at a much lower frequency than prices and quantities do.
However, there is disagreement about the extent to which living standards remained
broadly constant before 1800. Nordhaus (1996) examines the history of lighting to
suggest that cost of living indices have vastly underestimated the decline in the cost of
many goods over the last 200 years.13
We proceed as follows. First, we discuss the historical background and context
– how did sugar and tea, coffee and tobacco enter European consumption? In section
III, we discuss our data sources. Section IV presents our methodology and main
findings. In section V, we examine the robustness of our findings to alternative data
sources and calibration assumptions, as well as alternative methods of calculating the
value of new goods. Section V concludes.
II. Historical Background and Context
In this section, we summarize the existing literature on living standards over the long
run. We also describe how sugar, tea, coffee and tobacco became items of mass
consumption in Europe.
Living standards in England before 1850
Measures of per capita income and of living standards broadly suggest stagnation
until 1800.14 Figure 1 presents two real wage series for the period of this study, one
by Phelps-Brown and Hopkins (1981) and a more recent series by Clark (2005).
Phelps-Brown and Hopkins used a Laspeyres index for the seven centuries covered by
their index, with a weight of 70% for food. Their results suggest that Englishmen saw
their living standards surge by almost 200% after the Black Death in the middle of the
fourteenth century. After 1500, a long period of decline set in. By 1600, much of the
gain in living standards from the plague had disappeared. The 17th and 18th centuries
then saw a recovery. Nonetheless, by 1800, living standards were still 25%-50%
lower than they had been in 1450. Loschky (1980) reworked the Phelps-Brown and
Hopkins series, using Paasche and chain weighted price indices. His findings are
markedly more optimistic, showing a less-marked decline during the early modern
period. This is mainly due to changes in the relative price of manufactured goods,
13 Hulten (1996) questions the plausibility of Nordhaus’s result.
14 According to Maddison (2001), English GDP per capita rose at a rate of less than 0.3% between
1500 and 1700.
which became cheaper. For example, his Paasche index recovers its post-Plague peak
by the middle of the 18th century, a full 100 years before the date given by Phelps-
Brown and Hopkins.
Clark (2005) offers a new, improved real wage index, drawing on a host of
additional information. He changed both the wage series and price index. His
expenditure weights come largely from the end of the period. The results of his
calculations are shown in Figure 1. Since the Clark price index tracks many more
items, it is less volatile. The real wage index surges and falls less sharply. Clark
confirms the earlier, pessimistic results by Phelps-Brown and Hopkins for the period
after 1500—it wasn’t until 1850 that the average Englishman had a real wage that was
greater than his counterpart’s in 1500.
Real Wages (1860 = 100)
1400 150016001700 18001900
Phelps Brown & Hopkins
Figure 1: Real income in England, 1400-1850
The question if living standards improved after 1750 – the classic period of the
industrial revolution – has been hotly debated since the days of Marx and Engels. For
period 1770-1850, Clark (2005) finds larger increases than earlier authors had
suggested. Initially, estimates by Lindert and Williamson (1983, 1985) implied large
wage gains. Their cost-of-living indices were comprehensively revised by Feinstein
(1998), who expanded the range of commodities covered. By doing so, he found
markedly smaller wage gains – a plus of 30% between 1780 and 1850, instead of
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We briefly set out our methodology for correcting the quantity of tea consumed in
Britain for the effect of smuggling. Figure A1 demonstrates the problem – legal
imports jump around the date of the big duty reduction. To eliminate the effects of
tariff changes, we estimate
where Q is the (legal) quantity of tea imported, p is the retail price, D is the duty
charged on tea imports, and ε is the error term. Since naval wars and weather events
were responsible for most of the short-term variation in prices, we think of this basic
relationship as tracing out the (short-term) demand curve. By adding a control for the
tariff, we incorporate information about incentives to smuggle. Estimating eq. A1
yields coefficient (t-statistic) estimates for C, β, and γ of 3.05 [25.9], -0.008 [13.7],
and -0.008 [5.8]. This suggests that years with high imports were on average
associated with low retail prices. Over and above the effect from low retail prices,
lower duty charged also coincides with greater imports.46
46 To the extent that the regression picks up a common trend, we will be overcorrecting for smuggling,
thus biasing results against our claim that new goods added substantially to welfare.
To adjust for the effect of smuggling, we want to know how large total imports would
have been had it not been for a (time-varying) incentive to smuggle. To calculate a
constant-smuggle import series for tea, we hold the tariff rate constant at the period
average. We then use the estimated relationship from A1 to predict tea demand in the
absence of tariff changes. This effectively reduces the rate of growth in the British
demand for tea. Adjusted tea imports in the (early) years of our sample are now
markedly higher. Figure A1 illustrates the change. During the period of the highest
tariffs, the middle of the 18th century, there is substantial divergence between the
corrected and uncorrected series. Then, as tariffs are cut drastically after 1784, the
predicted series falls below the ‘legal’ import series. Overall, the variability of the
new, predicted series is lower than of the official imports.