Why growth is good for you (and for your neighbours too)

The Economist has a review (subscription only) of a new book by Harvard’s Ben Friedman, The Moral Consequences of Economic Growth.

Mr Friedman argues that conventional thinking about economic growth is too narrow: it neglects its moral and political benefits. “The value of a rising standard of living lies not just in the concrete improvements it brings to how individuals live but in how it shapes the social, political and ultimately the moral character of a people.” Growing prosperity, history suggests, makes people more tolerant, more willing to settle disputes peacefully, more inclined to favour democracy. Stagnation and economic decline are associated with intolerance, ethnic strife and dictatorship.

It is not obvious that this should be true, so why has this tended in practice to happen? Mr Friedman’s explanation is that people’s sense of well-being is essentially relative. They become accustomed to any fixed standard of living, rich or poor. They are happiest if they feel their standard of living is rising (something that, in principle, all members of a society can experience at once), or if they feel that they are better off than their peers (which is divisive and not an aspiration that everyone can realise at once).

The key thing is the way these two standards of comparison—the potentially harmonious and the socially self-defeating—interact. If people are becoming better off relative to their own past standard of living, they will care less about where they stand in relation to others. If they are not growing better off relative to their own past standard of living, they will care more about their placing in relation to others—and the result is frustration, intolerance and social friction. Growth, in short, has moral as well as material benefits.

This, as the author notes, has an intriguing implication. Throughout the book, Mr Friedman gives due emphasis to the role of economic externalities, such as pollution. He also emphasises that economic policy needs to take account of these if growth is to provide the maximum social and economic benefit.

But if he is right about the moral benefits of economic growth, then growth itself involves an externality—not a negative one, like pollution, but a positive one. The material benefits of growth, chiefly in the form of extra goods and services, are priced in the market; the social and political spin-off is not. Left to their own devices, market forces will therefore provide too little growth. Adam Smith does not have it all his own way. In principle, the analysis favours a range of pro-growth interventions.

Here’s hoping that Clive Hamilton and Ross Gittins find copies in their Christmas stockings.

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