EVENTS

Date:	Monday, January 9, 2006
Time:	12:00 PM -- 1:45 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

January 2006

The Moral Consequences of Economic Growth

Is economic growth bad for our “moral character”? Harvard economics professor Benjamin Friedman argues precisely the opposite in his new book, The Moral Consequences of Economic Growth. Economic growth typically brings “greater opportunity, tolerance of diversity, social mobility, and commitment to fairness and dedication to democracy.” When living standards plateau or decline, societies make little progress toward these goals and often regress. At a January 9 AEI-Brookings Joint Center panel discussion, Professor Friedman addressed the positive connections between growth and morality and recommended policies that could enhance the moral benefits created by rising standards of living.

Robert W. Hahn
AEI-Brookings Joint Center

Today’s panel is about morality and economics. An understanding of the relationship between morality and economics could have some important policy implications. Morality and economics are frequently treated as separate subjects. But some notable economists and philosophers have recognized there is a linkage, including Adam Smith, Lord Keynes, and John Rawls.

There has not been much talk of morality from economists. However, Professor Benjamin Friedman penned this wonderful book, The Moral Consequences of Economic Growth. Morality is not this economist’s strong suit, so let’s talk about economic growth.

If we think of the economy as a pie--we could define economic growth in the aggregate--that is, is the overall pie getting larger? We can imagine that a rising tide lifts all boats as well as one that only lifts some boats. The distribution could have many consequences.

A key argument of Professor Friedman’s is that economic progress and moral progress march together. The thesis is more nuanced than this, but this is the general idea.

Benjamin M. Friedman
Harvard University

Why should we care about economic growth? It seems like a silly question, but it is one that is necessary since our commitment to growth is not as solid as it should be. Economic growth clearly improves basic human conditions, like health. Somewhere between standards of living at one-third and one-half of ours, societies achieve the same health outcomes--countries like Portugal and Korea, for example,

A society that improves material living, broadly distributed throughout the population will also experience benefits in social experience. There are moral positives that come with economic growth, such as the provision of opportunity and mobility, tolerance, and fairness across groups and individuals.

These benefits have four implications:

1. It provides optimism for poorer countries. It is not wealth that provides moral benefits, but the sense of moving forward that provides the moral benefits described in the book. Therefore, countries that are poor do not have to wait to become wealthy before they see the benefits of economic growth, like democratization. They simply have to maintain growth. South Korea, for example, went from negligible incomes to a country that has 40 percent of our wealth in just a quarter-century. In that time they went from a one-party military dictatorship to an electoral democracy. The country that everybody thinks of when I state this is China. China has a visible increase in material wealth. The implication of the book’s thesis is that China will develop liberal democracy. It is a good test case for the book’s thesis.
   
2. There is room for pessimism. The United States has not seen real median income growth in the past five years. People ask themselves if they are getting ahead relative to their parents in similar life-cycle positions. If people do not feel as though they are getting ahead, there could be negative consequences. For example, attitudes towards immigrants in the United States closely track economic growth.
   
3. The market does not deliver economic growth at a rate that is optimal. It does not factor in the moral benefits, and therefore growth will be underprovided by the market mechanism.
   
4. We need to fundamentally change the way we talk about growth. We cannot continue to talk about the tradeoff between the material and the moral, since there is a positive moral dimension to economic growth.

Christopher DeMuth
AEI

The essential argument of the book is a great truth. There are two problems and two positives to address.

Economic growth is described as causing moral progress in some parts, but the relationship is described as the reverse in other periods. Friedman should have acknowledged historical examples that are problematic. His narrative is like Voltaire and too above the fray.

Liberal attitudes depend on institutions and are often in response to horrible atrocities. The Magna Carta was in response to such an atrocity. The Declaration of Independence is the essential Enlightenment document, but it was in response to George III. Japan and Germany had institutions placed upon them.

In the early twentieth century, Norm Angel argued that economic progress leads to social progress. Then World War I and the next forty years showed that this is not the case. Much of the slaughter occurred in poor countries like Russia and China, but Germany also had such atrocities. Human nature is durably two-sided, and economic progress has the potential to amplify both the good and the bad.

Economic progress breeds discontent with commercial culture, for example in the forms of radical environmentalism and anti-globalization movements. You would not find discontent in the demographic profile of these people or in the demographic profile of radical Islam. Prosperity can lead to radical disaffection.

Friedman lets his personal politics take part in the discussion of modern history and pushes his thesis too hard. He says the 1980s were bad, the 1990s were good, and the 2000s have been bad. The thesis is not capable of calibrating this finely.

The values of tolerance and openness are not the same to everybody. Friedman argues that if growth stagnates then we will see the rise of hate groups and anti-government militias. This is gone forever. America is the most open country in the history of the world. Economic growth is open-ended, morality is not.

The immigration discussion is particularly good.

The argument that economic growth should be at the center of government policy is right. Debunking the anti-growth arguments is a great contribution of the book. Friedman is right that there is a disorder at the heart of the political system. Entitlement spending is going to grow too fast. There is a disconnect between the parties and policy.

It is worth giving up some immediate happiness for growth. We spend our kids’ money. There might be short-term moral consequences, but in the long run this growth is important.

Growth is particularly important in the developing world. There have been policy mistakes in the past, but it has become an area of serious policy debates.

The discussion of education and medical care reforms was particularly good. Friedman views them as the most important issues. The discussion of choice, incentives, and market mechanisms is good. The libertarian and conservative emphasis on individual choice rings hollow to many Americans on these issues. Friedman’s assertions that it is because they are part of the public good is right, and a way to bridge the Left/Right divide on these issues.

Amitai Etzioni
George Washington University

This is a wonderful and insightful book.

What happened to Max Weber? Is it possible that there is a spurious correlation and that social factors are driving both moral progress and economic growth? This was where Weber compared the Catholics of his days to the Protestants to see if Catholics could be compatible with capitalism or democracy.

Sometimes Friedman talks about growth as the driving factor, and sometimes the discussion is about who gets the growth. What is the driving factor? It is impossible to have economic growth without some spilling over to everybody, but the question is how much? John Rawls, for example, said that as long as the lowest get something then he was happy, but Professor Friedman might not be happy with this.

On page eighty of the book, Professor Friedman says that what really matters are family and friendship. Do family and friendship correlate with economic growth? There are lots of data that shows that happiness and growth are not related.

It is frustrating when economics turns to psychology. Why do people do jobs for less? Economics always turns to psychic income. The study of psychic income and happiness is tricky. Reference groups matter. Some people compare themselves to who they see on television; the fire department compares itself to the police department.

One of the most telling studies involves American soldiers. Military police have a difficult time being promoted, but in the Air Force promotion comes easily. The Air Force is expected to be more content, but the results were the other way around. The expectations of no promotion for military police meant that they were excited when they were promoted, but did not expect it. In the Air Force, there were spiraling expectations.

In China and India it would not be surprising if there were more discontent as growth drives expectations.

If we grant Friedman’s thesis, the question is when is enough, enough? Do we want a 24/7 society? Per capita income has not grown, but household income has grown. This is because more women work outside the household. Where will future work hours come from? The hours will come from fewer holidays, longer hours, and a greater number of teens and the elderly working. If there is no recognition that income has diminishing marginal utility, then we will live in a world with a race to the bottom.

There is a lot of value to economic growth, for its own sake and for its moral consequences, but we must also recognize that it could undermine some core values.

If your only concern is social justice and distribution, the same story arises. Under what conditions are people willing to significantly reallocate? There are many upper-middle class students who get their sense of care for the poor from their religious values.

Benjamin M. Friedman

Thank you for the substantive critiques.

Causation runs both ways, but the book focuses on the direction of economic growth driving moral progress.

Chris asks what else is being held constant--what are the limiting conditions? The strategy used was to paint big ideas and then focus smaller so that we see a general direction.

To answer Amitai’s question on whether it was growth or distribution of the growth that drives moral progress, the answer is that it is broad distribution. To paraphrase former senator Lloyd Bensten: I knew Jack Rawls, Jack Rawls was a friend of mine, I am no Jack Rawls. Instead, my point is that income growth for the middle three-fifths of the population is important for moral progress.

It is a scary prospect that growth could come from more hours at work. However, the United States has seen 1.8 percent annual growth over 200 years, and the work week has declined. There has been an increase in human and physical capital.

Religious values play an important role in these discussions, as even Adam Smith was influenced by religious values.

AEI-Brookings Joint Center research assistant Joel Wertheimer prepared this summary.