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Safety Nets, Growth, and Liberation from Family

In his by-request post on safety nets, Tyler writes:

Most of all, the welfare state liberates the productive and the creative from their sometimes burdensome family ties. The welfare state is the Randian’s secret dream, and that is what clinches the case for a government safety net.

I don’t think I understand. How many productive and creative people take advantage of government assistance programs for the poor, or are liberated by them? It would seem that genuinely productive, creative people would need them least.

Probably Tyler means that Social Security and Medicare allow the productive and creative to foist their poor parents off on the state. True. But increasing incomes also allow the productive and creative to foist their not-so-poor parents off on “assisted living” facilities. Wealthier parents don’t need their kids’ money, and wealthier kids can afford to have somebody else worry about their parents. How much has the deadweight loss of our actually existing, almost entirely middle class to middle class “social insurance” tranfer system decreased economic growth over the last half-century? It is not obvious that the history of our real system compares favorably to even a slightly higher-growth counterfactual in terms of the kind of liberation from burdensome family ties Tyler is talking about.

If you’re a Sen-type positive liberty advocate like Tyler, and don’t so much care about the coercion implicit in transfers, your problem with safety nets ought to be the potentially psychologically debilitating effects of transfers on the recipients with respect to a sense of control, self-efficacy, motivation, etc. I do not doubt for a second that many, many people have been genuinely helped by public assistance. I do, however, have some doubt that the overall effect has been positive relative to some of the potentially feasible alternatives.

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Happiness and Economic Growth

My piece on happiness and economic growth in this month’s non-American Prospect has escaped from behind the paywall and is now available for your cost-free reading pleasure. I have to say I’m pretty psyched that my kitten-strapped-to-a-guillotine-connected-to-a-bicycle analogy came through intact:

The fact that average self-reported happiness has not risen with average incomes does not imply that there is no point in becoming richer. A steady rate of growth may be necessary to keep happiness and other good things at a high stable level. (Imagine a guillotine, on which a kitten is strapped, connected to a bicycle that must be pedalled ever more quickly to keep the blade aloft. Slow down, and the kitten gets it.) In The Moral Consequences of Economic Growth, Harvard economist Benjamin Friedman argues that steady economic growth “fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy”—a list I doubt any politician would come out against.

I assure you that it all makes sense in context.

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Growth is Good

If you happen to be a subscriber to the Prospect (the British one), you can read my article on why politicians who say they care about happiness have got to care about economic growth and economic freedom. Otherwise, you can read the first 2.5 paragraphs. I’ll let you know if they make it free for non-subscribers.

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Tories for Happiness

The politics of happiness research just got a bit more interesting. British Conservative leader David Cameron is now campaigning on a happiness platform. In a speech at a conference organized by Google in Hertfordshire, Cameron said,

It’s time we admitted that there’s more to life than money, and it’s time we focused not just on GDP, but on GWB—General Well-Being.

This is interesting because up until now, the politics of “well-being” have been primarily a welfare-liberal or social democratic phenomenon. So why the happiness schtick for the Tories? Why now? The Financial Times editorial page says:

Continue reading “Tories for Happiness”

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Institutions, Boundaries, and Useless Statistics

Don Boudreaux has been doing the Lord’s work by pointing out that economies are not bounded by political borders. I’ve made the point before that the better a state’s institutions are, the less the state level is the appropriate final unit of analysis. Good institutions within a state’s borders are precisely what enables the people under the jurisdiction of a state to create complex networks of economic, political, and moral cooperation with people outside that jurisdiction. Which is a way of saying the good institutions in here increase our interdependence with people and institutions out there.

Nothing has brought this point home to me more than the lovely, truthy, graphics accompanying Richard Florida’s Thomas Friedman takedown “The World is Spiky” [pdf] in the October 2005 Atlantic.

Scientific CitationsPatents

[click for full-size]

What is manifest in the pictures is that U.S. institutions, in addition to producing more wealth and using more energy, produce scientific discoveries at a rate far outpacing the rest of the world. Just glancing at picture, it appears that MIT and Cal Tech combined produce almost as much scientific discovery as all of of Europe, which in turn produces more science than the rest of the world. The market economies of the Pacific Rim produce a trickle of science, but produce on overwhelming proportion of the world’s tehnological innovation as measured by patents.

Here is one of these pictures’ 1000 stories. American institutions confer a fantastically huge positive externality, in terms of knowledge, to the rest of the world. Science is a root cause of economic growth. New knowledge enables new technologies, which enable increases in the productivity of capital, which enable growth. And good institutions are the root cause of science. If the U.S. produces most of the world’s knowledge and Asia produces most of the world’s technology, then the institutions that underpin epistemic and technical advance are chiefly responsible for growth in states that have different institutions, but which are able to import knowledge. Which is why it is nonsense to compare, say, American and French GDP growth, as if those growth rates were a function of American and French institutions in isolation from one another. Because institutions are not isolated. The interesting question is: what would French GDP growth have looked like if the U.S. had produced, say, only 10% of its actual scientific output? If the Japanese had made only a 10% of their technological advances? My sense is that French growth would not have looked good. (NB: I have picked the French because they are very good in science and tech, but even so, the point is, others are much better.)
And there’s the point. French institutions are good enough to take advantage of American science and Asian technology, and so can remain stable because they are plugged into others’ comparative advantages, and can power their system (literally: the French did not think up the nuclear reactor) on the uninternalizable positive externalities of other systems of institutions. The flip side, though, is that it would be a tragedy for the French, and the world, if American institutions produced less science. It is not just that the U.S. would be worse off if its institutions were more like France. France would be worse off if U.S. institutions were more like France.

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Growth and Economic Folk Morality

I recently wrote a review of Friedman’s Moral Consequences of Economic Growth for the forthcoming edition of the Cato Journal, and I wrote a lot of notes that I didn’t use. And what good are blogs if not for publishing your discarded book review notes!

A main weakness of the Friedman book is that he becomes increasingly fuzzy about what he takes to be the specifically moral consequences of growth. Toward the end, you strongly suspect “moral” in Friedman’s mouth means something like “egalitarian welfare liberal.” As much as this undermines the credibility or interest of his overall case, this move has been, I think, a rhetorical success for Friedman. His resolute sloppiness about the normative side of the equation gives him a lot of room to move. And he gets credit (though not so much from me) for avoiding the standard economist moral argument for growth. And here’s what I have to say about that.

Which consequences of growth count as moral consequences? This is no small question. The answer naturally turns on one’s moral theory. According to the utilitarian philosophy (sometimes just called “consequentialism”) morality is entirely a matter of consequences, and the consequences that matter are those that increase the net quantity of pleasure or happiness. If economic growth increases the net sum of happiness, then that’s all we need to know in order to endorse it morally.

In fact, a kind of simple utilitarianism is the house philosophy of the economics profession. In the orthodox neoclassical theory, utility just is a measure of the satisfaction of an agent’s preferences, and it is a logical consequence of the definition of terms that an increase in income leads to the choice of a more preferred combination of goods, thereby increasing utility. It should be emphasized that the formal notion of utility as preference satisfaction, is, well, formal, and is not a substantive psychological notion at all. Formal utility implies nothing whatsoever about subjective experience and is not synonymous with pleasure or happiness, just as “preference” in the formal theory implies nothing about liking or wanting. Preference is nothing more than that which is revealed by what an agent has done, and utility is the notation for representing it.

Nonetheless, economists are generally all-too-happy to shuffle back and forth between the two notions of utility according to convenience. The slide from formal to substantive utility, combined with utilitarian moral theory, leads to what I call “economic folk morality.” According to economic folk morality, the moral desirability of economic growth is close at hand. Broad-based growth makes almost everyone wealthier; wealthier people can satisfy more of their preferences; satisfying preferences just is happiness; and happiness just is the moral summum bonum. So growth is morally good. QED.

But economic folk morality is false for at least three reasons. First, preference satisfaction does not entail happiness. It is possible to want and get things that will make us miserable. Second, the pleasure or happiness a life contains does not exhaust its value. The value and quality of our lives depends not only on how we feel, but also on how much of our human potential has come to fruition, the content of our characters, and the objective nature of our behavior. Third, morality is not primarily a matter of adding up a quantity of anything. A person who achieves her ends, honors her obligations, and contributes to her community has lived a moral life, regardless of the quantity of happiness she added to it.

Part of the interest of Friedman’s book is that he does not lean on the economic folk proof for the morality of growth. Insofar as the folk proof is unsound, that has to be to Friedman’s credit. However, the folk proof is tantalizingly close to a profound truth about the morality of economic growth. My complaint is that Friedman’s list of the moral consequences of growth are in fact moral consequences only because they are instrumental to some further state of affairs that is good.

Democracy, tolerance, openness are not good for their own sakes, but for what they enable. But what they enable—an increase in the scope of opportunity and the realization of meaningful human ends—is what economic growth enables, too. Friedman’s moral favorites are not things of independent value with which to justify growth. Rather these liberal desirables are part a package of political-economic goods that already includes growth. These elements are part of the same package in virtue of the fact that they each make life more secure, more satisfying, and more worth living. Growth has better consequences when it occurs within a liberal system. But liberalism is worth having in very large part because it enables economic growth and its consequences. Friedman’s moral desirables are in fact desirable because they enable and magnify the life-enhancing powers of wealth. If it is true that growth in turn enables the conditions that enable it, then we will have a virtuous circle. But we have to get out of the circle to morally vindicate growth. And the folk proof shows the way: growth makes life better.

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Positive Externalities of Positional Preferences

Most of the literature on positional preferences emphasizes the downside. But what if the upside is bigger?

Becker and Murphy in Social Economics argue that without a taste for status, there would be too little entreprenuerial activity, because the expected monetary payoff of an entrepeneurial gamble would often be too small. However, if you add the expected status payoff to the monetary payoff, entrepreneuial gambles become rational. We would all be poorer if we didn’t have a taste for status.

Today, Tyler points to a number of papers by Rick Harbaugh. His “Falling Behind the Joneses: Relative Consumption and the Growth-Savings Paradox” is a beautiful example of the possible upside of positional preferences. Here is the introduction:

Consumers in rapidly growing economies should borrow against future earnings to smooth consumption, or at least should save at a lower rate than consumers in countries with stagnant or falling incomes. Instead, multi-country studies show a strong positive correlation between income growth and savings rates (Bosworth, 1993). Such a correlation could result from high savings rates inducing high growth rates (Lucas, 1998), but the pattern in most rapid-growth economies has been for rapid income growth to precede sharp increases in household savings rates. Of the possible explanations for this growth-savings paradox, the Duesenberry (1949) relative consumption model, which assumes utility comes from individual consumption relative to societal per capita consumption, seems an unlikely candidate. Rising incomes would appear to induce excessive consumption as consumers attempt to “keep up with the Joneses”. This notion is examined with a simple two-period model. Rather than increasing consumption, concern for relative consumption can induce a fear of falling behind which raises precautionary savings. As societal income growth increases this fear intensifies, allowing for a positive effect of growth on savings rates and potentially explaining the growth-savings paradox.

Benjamin Friedman argues that growth is a public good and, as is the nature of public goods, individuals will underinvest in it unless the government does something about, in this case by mandating or rewarding savings relative to consumption. Could it be that our fear of falling behind just is the “tax” that motivates investment in growth?

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Model Argument Against Benjamin Friedman

Not against the idea that growth is good (heaven forbid), but against what Friedman says is good about it.

(Cogency warning: this is a sketch, and only sketch. Blog as dialectical scratchpad.)

Friedman argues that economic growth “fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy,” and that these are moral goods.

This is a varied list, is it not? Let’s just assume that Friedman is arguing that growth actually produces more fairness and democracy and not just “commitment” and “dedication.” Anyway, many of the things on the list strike me as the vehicles through which growth creates moral consequences.
This of course all depends on what you think “morality” is about. What do I think morality is about? I think morality is, on the one hand, about people realizing the ends that make their lives meaningful and, on the other, about the constraints on individual and collective opportunistic behavior that enable individuals to realize their meaningful ends in cooperation with others.

It turns out that my foundational theory of what morality is FOR says that the function of morality is, by and large, to enable gains from cooperation. That is, the point of morality is to produce cooperative surpluses. (That morality does enable gains from cooperation is an evolutionary possibility condition for morality. If it didn’t enable cooperative gains by constraining opportunistic behavior, morality wouldn’t exist.) But economic growth just is periodic expansion in the overall size of the surplus in the broader network of cooperation. So, the way I see it, economic growth is more or less what morality is for.

For instance, fairness matters because cooperative surpluses matter. If we cannot divide the gains from cooperation according to terms that each party finds mutually agreeable, then we will not cooperate, and so there will be no gains to divide. Fairness is morally desirable because gains from cooperation are morally desirable. If growth produces more fairness, then great, because fairness leads to cooperation, which leads to cooperative surpluses, and better cooperation leads to bigger surpluses, which is what we want! The moral consequence of fairness is: growth! And if Friedman is right and fairness is a moral consequence of growth, then growth is a moral consequence of itself. Growth is its own reward!

Surplus is desirable because we’re individually better off with a piece of the surplus than without a piece. That’s why we cooperate. And by “better off” I mean: helps us realize our meaningful ends. I actually mean more than that. The surplus often opens up the space of ends, making formerly infeasible ends feasible. Some of these ends will be more meaningful for us than the ends in the pre-surplus feasible set. So surpluses can make available more meaningful ends, and therefore more meaningful lives. And meaningful lives is the real bottom line.

If increasing cooperative surpluses in the service of meaningful lives is what morality is for, then it may seem that growth is basically what morality is for. Maybe we’ve got a scalability issue here, and surpluses arising from huge impersonal networks of cooperation have too many negative external effects, and so defeat the ability to put our shares of the surplus to use in building meaningful lives. Morality collapses in on itself at a certain scale. I doubt it. But the real point is that this is a question about whether morality is scalable or self-defeating. If we can point out that growth has moral consequences, but all we’re doing when we point that out is that growth helps consolidate the preconditions for growth, then we will have gotten exactly nowhere.

Either growth facilitates our ability to live ever more meaningful lives in cooperation with one another or it doesn’t. If it does, that’s the worthy moral consequence of growth. If growth does that in part by promoting itself through increasing cosmopolitanism, broadening opportunity, increasing demand for liberal political institutions, etc., then great. But we should just take the argument straight home to meaningful lives rather then getting hung up in the socio-political instrumentalities. If growth doesn’t facilitate our ability to live ever more meaningful lives in cooperation with one another, then growth is immoral, even if the antecedents of growth are morality itself. Then our task would be to pick out where the scale problem begins, and try to refurbish morality, and our moral sensbility, to reflect its own limitations of scope.

Well, I’ve got some real problems with that, but it was fun! What’s your beef?