Promoting Economic Growth Is An Investment in Societal Mores

By Benjamin Friedman

Published June 16, 2006, issue of June 16, 2006.
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Why are we so often at cross-purposes, and at times seemingly embarrassed, about our attitude toward economic growth? Even in those parts of the world where the need to improve nutrition, literacy and life expectancy is urgent, there is often a grudging aspect to the recognition that achieving superior growth is a top priority. And in the United States, the political process often fails to muster the determination to press forward, especially when faster growth would require sacrifice from entrenched constituencies with well-established interests.

The root of the problem is that our conventional thinking about economic growth fails to reflect the breadth of what growth, or its absence, means for a society. We recognize, of course, the advantages of a higher material standard of living, and we appreciate them. But moral thinking, in practically every known culture, enjoins us not to place undue emphasis on our material concerns.

We are also increasingly aware that economic development — industrialization in particular, and more recently globalization — often brings undesirable side effects, like damage to the environment or the homogenization of what used to be distinctive cultures, and we have come to also regard these matters in moral terms. On both counts, we therefore think of economic growth in terms of material considerations versus moral ones; we weigh material positives against moral negatives.

This thinking is seriously incomplete, in some circumstances dangerously so. The value of a rising standard of living lies not just in the concrete improvements it brings to how individuals live, but also in how it shapes the social, political and, ultimately, moral character of a people.

Economic growth — meaning a rising standard of living for the clear majority of citizens — more often than not fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy. Ever since the Enlightenment, Western thinking has regarded each of these tendencies positively, and in explicitly moral terms.

Even societies that have already made great advances in these very dimensions, such as most of today’s Western democracies, are more likely to make further progress when their living standards rise. But when living standards stagnate or decline, most societies make little if any progress toward any of these goals — and in all too many instances they plainly retrogress. Many countries with highly developed economies, including the United States, have experienced alternating eras of economic growth and stagnation in which their democratic values have strengthened or weakened accordingly.

How the citizens of any country think about economic growth, and what actions they take in consequence, is therefore a matter of far broader importance than we conventionally assume. In many countries today, even the most basic qualities of any society — democracy or dictatorship, tolerance or ethnic hatred and violence, widespread opportunity or economic oligarchy — remain in flux.

In some democratic countries democracy is still new, and therefore fragile. Because of the link between rising or falling living standards and social and political development, the absence of growth in so many of what we usually call “developing economies” — many of which are not actually developing — threatens their prospects in ways that standard measures of national income do not even suggest. The same concern, however, also applies to mature democracies, albeit in a more subtle way.

Even in the United States, the quality of our democracy — and more fundamentally, the moral character of American society — is at risk. The central economic question for the United States at the outset of the 21st century is whether the nation in the generation ahead will again achieve increasing prosperity, as in the decades immediately following World War II, or lapse back into the stagnation of living standards for the majority of our citizens that persisted from the early 1970s until the early 1990s.

In each year from 2001 through 2004 (the most recent data available), the average American family’s income failed to keep pace with inflation — the first such four-year consecutive decline since the government started compiling this information nearly 40 years ago. In 2000, income for a family at the middle of the nationwide scale, in 2004 prices, was $55,650. By 2004, it was only $54,060.

And there is little reason to think that 2005 will turn out to have been much different — or, for that matter, 2006. With most stock market indexes flat or down over this period, the assets in people’s 401(k) plans have not increased either. Only the price of their houses is going up.

Four straight years — or perhaps five, and now maybe six years — of decline for more than half of all American families signal a problem that goes well beyond the usual ups and downs of the business cycle. Since 2000, total American production of goods and services has increased on average at 2.6% per annum. But because the fruits of that increase have accrued to only a small group at the top of the income distribution, the majority of families are worse off. The American economy may be doing well, but most Americans aren’t.

The further, and far more important, question that follows is how continuing on this downward economic trajectory would affect America’s democratic political institutions and the broader character of our society. As economic historian Alexander Gerschenkron once observed about the Nazi era in Germany, “even a long democratic history does not necessarily immunize a country from becoming a ‘democracy without democrats.’”

Hitler’s rise to power in the wake of economic and political chaos under the Weimar Republic is a familiar story, but it is worth recalling that as late as 1928 the Nazi Party drew only 2.8% of the vote in German national elections. What made the difference soon thereafter was the onset of the depression. Similarly, France’s Vichy regime, which willingly collaborated with the Germans — France was the only European country besides Bulgaria to turn over to the Nazis Jews from territories that the Germans did not occupy — emerged out of a protracted period of French economic stagnation.

While the consequences have not been so catastrophic, America’s history too is replete with instances in which a turn away from openness and tolerance, and often an erosion of political democracy, have followed on what the majority of our citizens have experienced as economic stagnation or decline. Examples abound: the rise of Jim Crow laws and the widespread anti-immigrant, anti-Catholic and antisemitic agitation of the 1880s and 1890s; the extraordinary appeal of the reborn Ku Klux Klan and the adoption of the Emergency Quota Act and then the National Origins Act — the most discriminatory immigration laws in our nation’s history — during the 1920s; and the rise of the right-wing “militia” movement together with another groundswell of anti-immigrant sentiment in the 1980s and early 1990s, before the strong economic growth of the mid and latter part of the decade effectively arrested both.

Our own experience, as well as that of other countries, readily demonstrates that merely being rich is no bar to a society’s retreat into rigidity and intolerance once enough of its citizens lose the sense that they are getting ahead. And, conversely — again, as in other countries — we have been able to push forward the qualities in our society that we value primarily at times when most of our citizens are moving forward economically, and can look forward with confidence in their own prospects and what the future holds for their children.

The familiar balancing of material positives against moral negatives when we discuss economic growth is therefore a false choice, and the parallel assumption that how we value material versus moral concerns neatly maps into whether we should eagerly embrace economic growth or temper our enthusiasm for it is wrong as well. Economic growth also bears moral benefits, and when we debate the often hard decisions that inevitably arise — in choosing economic policies that either encourage growth or retard it, and even in our reactions to growth that takes place apart from the push or pull of public policy — it is important that we take these moral positives into account.






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