The Moral Consequences of Economic Growth by Benjamin M. Friedman (Knopf, 592 pages, $35.00)
Once upon a time I took an undergraduate course in the history of economic thought. The assigned text was a slim little volume whose author announced in his introduction that he intended the book for “the average man and the intelligent woman.”
The Moral Consequences of Economic Growth, by the Harvard economist Benjamin M. Friedman, is aimed at the intelligent lay reader of either sex, which may or may not represent progress. Average students of economics no longer know much about the history or broader political context of their discipline, or have to read such popular classics as Robert L. Heilbroner's The Worldly Philosophers. Friedman's latest book is an effort to correct that narrow focus.
Written in clear English, the book lays out a thesis that derives directly from the Enlightenment: Economic growth is not just about material well-being and more stuff. It is the essential bedrock of the civic virtues of openness and tolerance and a commitment to fairness and democracy. “Growth is valuable,” Friedman writes, “not only for our material improvements but also for how it affects ... our society's moral character.”
Conversely, economic stagnation is a major breeding ground of intolerance, mean-spiritedness, and political ugliness. This is true even for very prosperous countries like the United States that might seem to have “enough.” But apparently it isn't the absolute standard of living that matters; it's the sense of progress. Psychological studies confirm that satisfaction depends less on a person's income than on how it is changing. For democracy and the public virtues to thrive, the majority of citizens need to feel that their standard of living or least their children's prospects are improving. Without that optimistic expectation, societies rarely make further moral advances, and they may regress. A democracy, it seems, has to keep delivering the goods -- the hope of improvement -- or it puts itself at risk.
This idea has become so familiar that it may now seem obvious. Of course, we are nicer and more generous on a full stomach. (Who was it who said we are all just seven meals away from murder?) For decades mainstream economists have told us that the economic pie has to keep growing if we want to avoid fighting over how it's distributed. And history is full of examples of the part that economic despair plays in social breakdown, from the collapse of Weimar Germany in the 1930s to the burning cars in France today. But just because something is obvious doesn't mean that everyone understands it.
A case in point is the absurd notion that we can airlift democracy into low-income countries with stagnant economies and civil strife. Friedman recently told an audience at the Council on Foreign Relations in New York that unless the situation in Iraq turns around soon, the prospects for democracy there are “negligible.” Conversely, he is optimistic that if China's rapid pace of economic development is sustained for another generation, political liberalization will surely follow.
Much of the book is a survey of 200 years of Western history and of recent events in the developing world, connecting the dots between periods of prosperity and political reform, and periods of economic hardship and populist backlash. The effort is broadly persuasive, though weakened by the occasional glaring exceptions (for example, the expansion of the American social safety net during the Great Depression) and important caveats (“The relationship is not exact ... since economic growth or its absence is hardly the only influence affecting social and political development.”).
The book also lacks the strong voice and sense of moral outrage that can take a book from good to great, or at least ensure that it is talked about enough to grab people's attention. Friedman is a true scholar, and he scrupulously presents all sides of an argument and all the available evidence, even if this information muddies the water and dilutes his own case. Still, he has produced a powerful rebuttal to some of the conventional assumptions of this country's governing elite.
Friedman is deeply concerned about the stagnation of American middle-class living standards during most of the past 30 years (with the brief exception of the late 1990s). Median household incomes in the United States have declined for the past five years in a row, meaning that more than half of the population is not getting ahead economically. If this book's analysis is correct, the increasing misdistribution of the rewards of growth is putting our democracy at serious risk.
Furthermore, market forces cannot, on their own, correct this situation. Friedman, an authority on financial markets, argues that the market mechanism left to itself will deliver too little economic growth. The market systematically underinvests in some key contributors to growth, particularly human capital. And because the public goods that spring from economic growth -- tolerance and openness and a robust democracy -- are goods that private markets neither price nor trade, a society that wants to secure those goods has “to seek growth beyond what the market would provide on its own.”
This implies that the government has to increase federal spending, especially on early education, where there is the greatest bang for the buck. Friedman points out that federal spending for all domestic purposes other than support of the retired elderly is already smaller, compared to America's national income, than it was in 1940.
Does this mean that the recent massive federal deficits don't matter? In Friedman's view, nothing matters more! Deficits are absorbing the private savings that would otherwise be invested in new factories, equipment, and research. No nation can maintain adequate capital investment, and hence look forward to improved productivity and living standards, while burdened with the kind of chronic deficits we now face.
So what can we do to increase public investments and reduce these crippling deficits? On this point, Friedman is unequivocal: We have to start by rolling back the disastrous Republican tax cuts. In his previous book, Day of Reckoning: The Consequences of American Economic Policy Under Reagan and After, and in several articles in The New York Review of Books, he has argued that the tax cuts of the 1980s and the even greater tax reductions of 2001 have actually hampered growth, by crowding out private savings, creating unsustainable deficits, and increasing inequality.
Everyone who writes about American democracy ends up by quoting Tocqueville, and Friedman is no exception. He gives this observation prominent play: “[A] slow and gradual rise of wages is one of the general laws of democratic communities. In proportion as social conditions become more equal, wages rise; and as wages are higher, social conditions become more equal.” Our democracy is no longer enjoying that virtuous circle. Friedman is an optimist, in that he believes we still have time to act. His is wise counsel and a sober warning. Let's hope someone is listening.
Ann Crittenden is the author of The Price of Motherhood and If You've Raised Kids, You Can Manage Anything.
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