Nailing the Economic Change
This article is an excerpt from the Feb 2022 edition of the Finance Gazette Volume IV. Click to read the whole edition
Who hasn’t dismissed nails as such a trivial product, that it provides no utility at all, except for attaching things together? However, if one were to say that it offers an insight into the economic change that has taken place over time across the globe, the idea would seem pretty laughable.
Yet, the price of nails does indeed speak volumes about how the global economic landscape has changed. This is because it is a basic and non-revolutionary product whose appearance has hardly undergone any change over the past two millennia. If one were to compare Roman nails to those of modern times, we would barely notice any differences. The one thing which has changed is the manufacturing process - nails of yesteryear were pounded out of iron by blacksmiths/ nail smiths, which are now spewed out machines in thousands per minute.
Before we talk nails any further, I would like to point out a few common mistakes which most people make (and of which I too was guilty of, whilst researching). The first is about how nails and screws are one and the same. A nail is a small metal spike with a broadened flat head that is easy to install and can be bent in any direction without breaking. Screws are metal pins with a helical thread running around them, which have more holding power as compared to nails and work in a wider range of materials. Second, while talking about prices, the distinction between the nominal and real values of a commodity is ignored. Nominal value is the unadjusted price of a product, which does not take into account inflation or other factors. On the other hand, the real value of a good is one that takes into account the price level changes that have occurred over a period of time. Keeping these points in mind, we move on with our analysis.
If one were to compare the Real Price of nails from 3 centuries back to present-day prices, the price of nails relative to all other consumer goods fell by approximately 10 times. The primary reason for this fall is the exponential increase in multifactor productivity levels. Workers are now able to produce more nails in less time as:
The materials used to make nails, iron in the earlier periods followed by steel presently, became less expensive which led to the two bursts of rapid price drops (1821–1860 and 1881–1930).
The energy source used to produce nails changed from hand power to water power to steam power to electricity, which transformed the manufacturing process.
The machinery used in the production process became more efficient and could produce more nails in a given period of time as automation took the world by storm.
People gradually became better at organising production, with the greater availability of electricity. People could use electricity coming from a single water wheel or from a single steam engine to manufacture nails, which in turn led to a rearrangement of the production process. It also led to a high degree of specialisation of labour.
The mid-20th century saw the end of the “golden age of nail manufacturing”, as real prices of domestically produced nails increased because of the following factors :
As stated above, this period saw a shift from the manufacturing of common nails to more specialised, higher-end products. This resulted in higher prices for the materials required to make these nails too.
The primary reason for this shift was the stiff foreign competition faced by the manufacturers of these ‘basic nails’, due to the dwindling pace of technological improvement in this sector. Thus, domestic producers gradually pulled away from producing basic nails and started producing specialised ones.
Presently, steel prices are up, shipping costs are close to touching the ceiling. In a nutshell, a perfect storm of factors has been pushing the nail prices upwards.
Next, we look at the historical data regarding the Nominal Price of nails. In the 17th century, logbooks and other such mediums were used to keep track of the prices of various commodities.
One such logbook from Greenwich Hospital, UK was analysed by William Beveridge (in 1939), which measured the prices of hand-forged nails of different sizes. Utilising the data available from that study, we arrive at the graph depicted here.
In 1695, this value was approximately 8 cents per lbs, which is represented in green in the graph below.
In blue is the price of hand-forged and cut nails in the city of Philadelphia from 1784 to 1813. The red portion of the graph is indicative of the prices of cut-nails. The series for forged nails (in green) in the United Kingdom lies below the series for mixed nails (in red) in the United States. This could be for a number of reasons. First, nails were probably produced more cheaply in the United Kingdom, although if shipping charges were added to prices in the UK, then it might be higher than the US prices. Second, and most importantly, the type of nails for which data were collected was not taken into account, so differences in prices could occur. Post-1813, data sources started to exclusively price cut nails. The jump in prices post 1813 is not all surprising, as it occurred during the War of 1812, which saw commodity prices rising exponentially.
As per the graph, you may notice that the price of nails has risen since the 1930s. The reasons behind this are:
As stated above, there was a transition from making common nails to other complex nails. Due to the unavailability of data, the graph here ignores the effect of the quality adjustment on the price of nails, that is, hedonic adjustments (like-to-like comparison) weren’t made. This was because it was impossible to measure the narrower categories of nails; so whilst measuring the broader categories, we observed prices rising faster than before.
This period also saw supply chain issues beginning to take root which, in modern times, has led to the Producer Price Index for nails increasing by 40% since 2020.
Now, you might be wondering, how exactly is all this related to the economic changes across the world? Well, the study of nail prices helps us understand a few things: First, pertaining to price measurement, the details of what the data available is measuring is of utmost importance, as without it we would be neglecting issues of evolving quality, import-substitution, and corresponding input technologies to manufacture the product. Second, nails serve as a reflection of some key patterns of the industrial sector. Automation as well as other technology-affecting factors like the greater availability of electricity played a huge role in changing the dynamics of the shop floor, which in turn greatly reduced the time required to manufacture a product. Most importantly, it highlights how the growth in imports of basic products where the scope for technological advancement is low, alters the face of an entire economy. Consider this, the share of nails in the Gross Domestic Product in 1810 which stood at 0.4%, the same as today’s share of household purchases of computers, is presently de-minimis.
All in all, even something as small as a nail can be a useful tool to analyze how the global economic landscape has changed over time. Author: Archishman Chaudhuri Illustration by: Arab Kansal