Friedrich Hayek argued that restriction of the use of the coercive powers of the state to enforcement of the negative rules of just conduct (prohibition of actions harming others) makes it possible for individuals and groups to live in peace without agreeing on common ends. He noted that mutually beneficial exchanges enable people to help each other to achieve their individual ends without agreeing on what those ends should be (Law, legislation and liberty, V2, 1982, p 110).
This line of reasoning implies that use of coercion by governments to advantage some people at the expense of others (for example, through government spending and taxation) is a threat to peaceful coexistence. Does this mean that we should expect to see a great deal of civil disorder in countries with high government spending?
Not necessarily. Peaceful coexistence can begin to disintegrate long before there is any evidence of civil disorder.
Consider the situation where people take action to avoid high taxes, for example by moving business activities to a country with lower tax rates. These avoidance actions may be legal and the people taking them may have a great deal of respect for democratic decision-making processes. It seems to me that these avoidance actions are just as much evidence of a breakdown in peaceful coexistence as they would be if they had been taken in response to threats of plunder by some group in the community who were taking the law into their own hands.
Wednesday, April 23, 2008
What are moral consequences?
In his book, “The moral consequences of economic growth”, Benjamin Friedman argues that economic growth has favourable moral consequences because it causes societies to move toward more tolerance, openness, mobility, fairness and democracy. In my view he makes a strong case, based on historical analysis, that periods of high economic growth have, in fact, been accompanied by greater tolerance etc in the United States and several other countries.
The question I want to consider here is whether it is appropriate to view the desirable social consequences of rising incomes as “moral consequences” and whether it is matters if the distinction between social consequences and moral consequences is blurred.
Friedman argues that during periods of economic growth people see that they are doing well compared with the benchmark of their own prior experience and thus place less importance on how well they are doing compared to other people. By contrast, during periods of economic stagnation people attach greater importance to living at least as well as others, and thus tend to be less tolerant and less generous in their attitudes and behaviours.
It is certainly desirable that we should be tolerant towards others, but it seems to me that this hardly qualifies as moral behaviour if we are only tolerant when we feel that our own living standards are rising. We do not view fair weather friendship as having moral virtue – even though fair weather friends can make fair weather more enjoyable - so why should we view the tolerance that others extend when their incomes are rising as moral behavior?
I think it is worth making a distinction between moral consequences and social consequences because some experiences can have lasting consequences for the values that people hold. For example, it is reasonable to suppose that participation in market transactions - mutually beneficial exchanges - tends to promote greater social interactions among people in different communities and hence to promote greater tolerance. It seems to me that the tolerance that develops from these favourable interactions could be viewed as both a social and moral consequence of markets. The relationships that develop through market interactions between relative strangers can enable the people involved to build the interpersonal trust that is integral to the more complex forms of cooperation (e.g. financing of investment and innovation) necessary for economic growth to be sustained.
In my view Benjamin Friedman should be applauded for his efforts in drawing attention to the desirable social consequences of economic growth. It seems to me, however, that the view that the morality of social cooperation depends on continually rising living standards involves too pessimistic a view of human nature. How could economic growth have ever got started if continually rising living standards were needed to generate the trust in others that was necessary for growth to begin to occur?
The question I want to consider here is whether it is appropriate to view the desirable social consequences of rising incomes as “moral consequences” and whether it is matters if the distinction between social consequences and moral consequences is blurred.
Friedman argues that during periods of economic growth people see that they are doing well compared with the benchmark of their own prior experience and thus place less importance on how well they are doing compared to other people. By contrast, during periods of economic stagnation people attach greater importance to living at least as well as others, and thus tend to be less tolerant and less generous in their attitudes and behaviours.
It is certainly desirable that we should be tolerant towards others, but it seems to me that this hardly qualifies as moral behaviour if we are only tolerant when we feel that our own living standards are rising. We do not view fair weather friendship as having moral virtue – even though fair weather friends can make fair weather more enjoyable - so why should we view the tolerance that others extend when their incomes are rising as moral behavior?
I think it is worth making a distinction between moral consequences and social consequences because some experiences can have lasting consequences for the values that people hold. For example, it is reasonable to suppose that participation in market transactions - mutually beneficial exchanges - tends to promote greater social interactions among people in different communities and hence to promote greater tolerance. It seems to me that the tolerance that develops from these favourable interactions could be viewed as both a social and moral consequence of markets. The relationships that develop through market interactions between relative strangers can enable the people involved to build the interpersonal trust that is integral to the more complex forms of cooperation (e.g. financing of investment and innovation) necessary for economic growth to be sustained.
In my view Benjamin Friedman should be applauded for his efforts in drawing attention to the desirable social consequences of economic growth. It seems to me, however, that the view that the morality of social cooperation depends on continually rising living standards involves too pessimistic a view of human nature. How could economic growth have ever got started if continually rising living standards were needed to generate the trust in others that was necessary for growth to begin to occur?
What is the difference between populism and popularity?
Like beauty, populism often seems to be in the eye of the beholder. Politicians often use the term to describe the policies of their opponents that have strong popular support. Is it possible to distinguish policy proposals that are populist from other policy proposals that have strong popular support? Given that political parties exist to compete for popular support, is the term populism ever more than just a term of abuse?
In reading the Benjamin Friedman’s book, The moral consequences of economic growth, I was reminded that politicians have not always shied away from the populist label. For example, in the U.S. in the late 1800s the People’s Party was unashamedly populist. Among other things this populist movement advocated an easier monetary policy, preservation of the way of life based on the small town economy, reduced immigration, and denial of voting rights to blacks. Friedman argues that this populist movement was in large part an expression of the anxieties and frustrations created by the hard economic times that persisted for nearly a generation leading up to the mid-1890s (p121).
At around that time there similar political sentiments were popular in Australia, for example opposition to Asian immigration and trade protectionism.
In my view the distinguishing characteristic of populist policies is their appeal to tribal instincts rather than to reason and cosmopolitan ethics (which provides the basis on which people who do not know each other can live in peace).
The first tribal instinct is that if something bad happens, blame some other tribe. So, for example, it appears obvious that the tribe should be suspicious of members of other tribes who are living in their territory, particularly when game is becoming scarce. Populists don’t seem to appreciate that immigration and international trade involve different issues than those involved in trespass and poaching.
The second instinct that comes into play when something bad happens is for leaders to take the most obvious action to ensure that members of the tribe share the pain. So, for example, if reserves of water are diminishing, the obvious solution to ensure fair distribution would be for tribal leaders to regulate how the available water could be used. Populists don’t seem to appreciate that the most obvious solution is not necessarily the best solution. They oppose the use of markets to allocate scarce resources to highest value uses.
The third instinct is that economic order has to be imposed by tribal leaders. Populists don’t understand the concept of spontaneous order emerging from the interactions of individuals, each pursuing their own interests.
The fourth instinct is to oppose any attempt to suggest that the workings of the modern world are more complex than the tribal model implies. Populists don’t like the idea of their objectives being questioned and their proposals being subjected to public scrutiny through independent analyses conducted by competent professionals.
In my view the best defence against populism is an electorate which expects policy proposals to be put through a lengthy process allowing independent public scrutiny prior to implementation. Recent events in Australia suggest to me that many voters tend to become uneasy when they see politicians avoiding established procedures to implement policies that will be popular with particular interest groups.
In reading the Benjamin Friedman’s book, The moral consequences of economic growth, I was reminded that politicians have not always shied away from the populist label. For example, in the U.S. in the late 1800s the People’s Party was unashamedly populist. Among other things this populist movement advocated an easier monetary policy, preservation of the way of life based on the small town economy, reduced immigration, and denial of voting rights to blacks. Friedman argues that this populist movement was in large part an expression of the anxieties and frustrations created by the hard economic times that persisted for nearly a generation leading up to the mid-1890s (p121).
At around that time there similar political sentiments were popular in Australia, for example opposition to Asian immigration and trade protectionism.
In my view the distinguishing characteristic of populist policies is their appeal to tribal instincts rather than to reason and cosmopolitan ethics (which provides the basis on which people who do not know each other can live in peace).
The first tribal instinct is that if something bad happens, blame some other tribe. So, for example, it appears obvious that the tribe should be suspicious of members of other tribes who are living in their territory, particularly when game is becoming scarce. Populists don’t seem to appreciate that immigration and international trade involve different issues than those involved in trespass and poaching.
The second instinct that comes into play when something bad happens is for leaders to take the most obvious action to ensure that members of the tribe share the pain. So, for example, if reserves of water are diminishing, the obvious solution to ensure fair distribution would be for tribal leaders to regulate how the available water could be used. Populists don’t seem to appreciate that the most obvious solution is not necessarily the best solution. They oppose the use of markets to allocate scarce resources to highest value uses.
The third instinct is that economic order has to be imposed by tribal leaders. Populists don’t understand the concept of spontaneous order emerging from the interactions of individuals, each pursuing their own interests.
The fourth instinct is to oppose any attempt to suggest that the workings of the modern world are more complex than the tribal model implies. Populists don’t like the idea of their objectives being questioned and their proposals being subjected to public scrutiny through independent analyses conducted by competent professionals.
In my view the best defence against populism is an electorate which expects policy proposals to be put through a lengthy process allowing independent public scrutiny prior to implementation. Recent events in Australia suggest to me that many voters tend to become uneasy when they see politicians avoiding established procedures to implement policies that will be popular with particular interest groups.
Would free markets give too little growth?
These days we often hear people argue that economic growth should be reduced because it is associated with adverse environmental and social consequences. My response is that adverse spill-over effects (negative externalities) associated with economic growth do not provide a case for government action to reduce economic growth. There may be a case for government interventions directed specifically at ameliorating particular problems, but intervention is not warranted unless it is established that the benefits clearly exceed the costs.
How should we respond to the argument that the market determined rate of economic growth would be too low because growth has desirable moral consequences? Benjamin Friedman argues that a rising standard of living fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy (“The moral consequences of economic growth”, 2005). He suggests that this provides a case for government intervention to foster economic growth.
When I began reading Benjamin Friedman’s book I decided to ask myself the same set of questions as I have asked myself when reading stuff written by the anti-growth brigade.
1. Does the author establish that there are externalities worth considering from a public policy perspective? My answer is a qualified “yes”. I think he provides a lot of evidence that economic growth does foster greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy.
However, I agree with Will Wilkinson’s assessment that the author “often seems to infer the workings of the psychological mechanisms that link growth to moral consequence from the fact that he has judged something morally suspect” (here). For example, he makes the dubious judgment that increases in government spending on social welfare are evidence of moral improvement and that moves toward limited government are evidence of moral decline.
2. Does he establish a causal link between economic growth and the external effects that he wants governments to address?
Before I read the book I wondered whether Friedman had ruled out the possibility that the externalities he observed were attributable to economic freedom rather than to rising living standards. I think he successfully avoids this issue because his hypothesis is specifically about the consequences of rising living standards – that when we feel that our living standards are improving we are less concerned about our relative position in the distribution of wealth.
Nevertheless, Friedman has not established a link between economic growth as conventionally measured and positive externalities such as tolerance of diversity. He defines economic growth to mean “a rising standard of living for a clear majority of citizens” (p4). But he doesn’t discuss how living standards relate to measured economic growth. If individuals freely choose to work less hours per week as their income rises, should this count as an improvement in their living standards over and above the improvement in their incomes? I think it should count, but it is not reflected in conventional measures of economic growth.
The micro-foundations of Friedman’s analysis seem to me to make a great deal of sense. If we gauge ourselves to be doing well by comparison with our past living standards (or our parents living standards) then we are less likely to be concerned about keeping up with the Joneses or keeping ahead of the Smiths. I was surprised, however, that the author does not cite a large body of psychological research in support of this supposition. This is probably because not much psychological research has been undertaken that is directly relevant to this benchmark question. More work is needed in this area.
3. Would the benefits of the interventions that he proposes be likely to exceed the costs?
Who knows?. It seems to me that the author’s proposals for increasing investment is the kind of policy that might be considered to achieve some of the outcomes of a free market by a government with ideological objections to free markets. Some of his other proposals, for example those relating to introduction of more competition in public education, are consistent with greater reliance on free markets – despite the authors view that market forces would produce too little growth.
To sum up, I don’t think that Benjamin Friedman’s book makes a strong case that the rate of economic growth determined in free markets would be too low. Nevertheless, it makes a valuable contribution in pointing out positive social consequences of economic growth at a time when there has been much focus on supposed adverse consequences and even proposals to reduce growth by taxing wealthy people more heavily – on the grounds that their wealth makes other people feel miserable. I agree with Roger Kerr’s comment that this book provides a strong counter argument – namely that insufficient economic growth makes people doubt that they are making progress in their own lives, which is why they compare themselves with others and so experience feelings of envy and resentment.
How should we respond to the argument that the market determined rate of economic growth would be too low because growth has desirable moral consequences? Benjamin Friedman argues that a rising standard of living fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy (“The moral consequences of economic growth”, 2005). He suggests that this provides a case for government intervention to foster economic growth.
When I began reading Benjamin Friedman’s book I decided to ask myself the same set of questions as I have asked myself when reading stuff written by the anti-growth brigade.
1. Does the author establish that there are externalities worth considering from a public policy perspective? My answer is a qualified “yes”. I think he provides a lot of evidence that economic growth does foster greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy.
However, I agree with Will Wilkinson’s assessment that the author “often seems to infer the workings of the psychological mechanisms that link growth to moral consequence from the fact that he has judged something morally suspect” (here). For example, he makes the dubious judgment that increases in government spending on social welfare are evidence of moral improvement and that moves toward limited government are evidence of moral decline.
2. Does he establish a causal link between economic growth and the external effects that he wants governments to address?
Before I read the book I wondered whether Friedman had ruled out the possibility that the externalities he observed were attributable to economic freedom rather than to rising living standards. I think he successfully avoids this issue because his hypothesis is specifically about the consequences of rising living standards – that when we feel that our living standards are improving we are less concerned about our relative position in the distribution of wealth.
Nevertheless, Friedman has not established a link between economic growth as conventionally measured and positive externalities such as tolerance of diversity. He defines economic growth to mean “a rising standard of living for a clear majority of citizens” (p4). But he doesn’t discuss how living standards relate to measured economic growth. If individuals freely choose to work less hours per week as their income rises, should this count as an improvement in their living standards over and above the improvement in their incomes? I think it should count, but it is not reflected in conventional measures of economic growth.
The micro-foundations of Friedman’s analysis seem to me to make a great deal of sense. If we gauge ourselves to be doing well by comparison with our past living standards (or our parents living standards) then we are less likely to be concerned about keeping up with the Joneses or keeping ahead of the Smiths. I was surprised, however, that the author does not cite a large body of psychological research in support of this supposition. This is probably because not much psychological research has been undertaken that is directly relevant to this benchmark question. More work is needed in this area.
3. Would the benefits of the interventions that he proposes be likely to exceed the costs?
Who knows?. It seems to me that the author’s proposals for increasing investment is the kind of policy that might be considered to achieve some of the outcomes of a free market by a government with ideological objections to free markets. Some of his other proposals, for example those relating to introduction of more competition in public education, are consistent with greater reliance on free markets – despite the authors view that market forces would produce too little growth.
To sum up, I don’t think that Benjamin Friedman’s book makes a strong case that the rate of economic growth determined in free markets would be too low. Nevertheless, it makes a valuable contribution in pointing out positive social consequences of economic growth at a time when there has been much focus on supposed adverse consequences and even proposals to reduce growth by taxing wealthy people more heavily – on the grounds that their wealth makes other people feel miserable. I agree with Roger Kerr’s comment that this book provides a strong counter argument – namely that insufficient economic growth makes people doubt that they are making progress in their own lives, which is why they compare themselves with others and so experience feelings of envy and resentment.
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