Thursday, December 24, 2009

The Moral Consequences of Economic Growth

Benjamin Friedman’s (no relation to Milton) The Moral Consequences of Economic Growth argues that economic growth is morally good for a society by reducing conflict and increasing openness, tolerance and concern for others. He also argues, implicitly or explicitly, for redistributive policies (though rather less for government regulation—he is a open-markets-and-competition-is-good guy). His two thesis do not sit entirely easily together.

Friedman engages in a wide-ranging historical survey, arguing that periods of economic growth see more open and tolerant politics and social attitudes while periods of economic stagnation or recession see more conflict-ridden, fearful and intolerant politics and social attitudes. While I found the thesis engaging, I could not quite rid myself of the feeling that he was engaging in an enormous exercise in "cherry-picking". Not least because he never provides much of a developed framework or theory to explain why this pattern he identifies is so.

I did pick up one egregious error. Friedman claims (p.300) that Britain had a higher standard of living than Australia a century ago. Flatly untrue. Australian workers were notoriously better paid than British workers from the very early days of British settlement of Australia. Given average wages are determined by the ratio of labour to land+capital, hardly surprising.

In Part I, Friedman sets out what economic growth is and the Enlightenment context. In Part II, he engages in a survey of American history. In Part III he looks at the history of Britain, France and Germany. In Part IV he looks at the developing world and the global context of economic growth. He then concludes with a chapter on policy for the US.

Looking at his examples, it does rather seem that unemployment and fear of unemployment is the dominant factor in explaining political openness to change versus fearful closing inwards. Thus policies which impede the operation of labour markets—such as by raising transaction costs—are likely to be particularly unfortunate. (Contemporary France would be an example of this.)
As Friedman admits, the New Deal is a bit of a problem for his analysis, given he sees as a positive yet it came out of the Great Depression. Of course, an alternative view is that the New Deal is not a counter-example—either because it was not as much of a positive reform program as Friedman classes it as or because the upward shift in the real wages of those who remained employed was more important.

There is a lot of fascinating detail in The Moral Consequences of Economic Growth. Friedman has clearly read extremely widely and intelligently. Much of what he has to say (or cites) is sensible. Such as Amartrya Sen’s observation:
no substantial famine has ever occurred in a country with a democratic form of government and a relatively free press (p.343).
And Friedman is dealing with complex phenomenon. For example, dramatic technological change tends to increase income inequality by creating a premium for scarce skills. As said skills become more common, the premium declines. (Now, about IT pay rates …)

At a broad level, Friedman’s thesis is deeply plausible. Western civilisation is the most dynamic of human civilizations, the only one to create mass prosperity and economic growth as a mass experience. It is also the only one to create democracy as a mass experience, is the most socially liberal of civilisations, and so on.

And, if Friedman is correct, it makes the attempt to use climate change to justify massive economic regression even more daft. Not only is it deeply stupid to adopt policies to make economies less adaptive in the face of allegedly dramatic climate change, the suggestion that declining resources will make people like each other more and get along better is – let us say – counter intuitive. And, Friedman would argue, counter-historical. On the contrary, it would surely lead to deeply illiberal politics. (This, of course, may be the point.)

Friedman never completely convinced me of his thesis, simply because of the abiding suspicion that his examples, even though he assembles many examples, involved a certain amount of “cherry picking”. Still, an enjoyable, informative (and plausible) read.

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