Wednesday, April 23, 2008

How much do ideas matter?

In recent posts I have been discussing whether there is a tendency for people to be more tolerant in periods of economic growth than during periods of stagnation. In his book, The moral consequences of economic growth, Benjamin Friedman argues that when the economic pie is growing, people are happy that they are getting more than in the past and are less concerned about whether the slice they are getting is larger or smaller than that of other people.

Another way of thinking about this is in terms of perceptions about the nature of the economic game. The economic game can usually be thought of as a game of mutually beneficial exchanges in which everyone is a winner. However if individuals think that they can only win by taking from other people then they think they are playing a zero sum game (total gains minus losses equal zero). If large numbers of people think that way, the economic game actually becomes negative sum because there are costs involved in the redistribution process (including costs in lobbying governments to redistribute wealth or to defend the existing distribution).

In a growing economy people are more likely to perceive that they are involved in a positive sum game – gains clearly exceed losses and everyone has a better chance of being a winner. The opposite is true in a declining economy.

However, I think that ideas (or ideologies) often matter more than economic circumstances in determining perceptions about the nature of the economic game. I will give three examples.

First, it would be hard to think of anything more like a zero sum game than a gold rush. There is a limited amount of gold to be found. If one person is lucky enough to find some, that means that there is less gold available for others. As a result, mining camps could be expected to be unruly places with a great deal of dispute over mining claims (property rights). In fact, however, observers of the mining camps at the time of the Australian gold rushes of the 1850s were surprised at the order maintained and the capacity for spontaneous organisation shown by the miners, who came from many different countries. In many camps order seems to have been maintained through the miners’ own efforts to ensure compliance to informal codes of conduct rather than through a permanent police presence. (See Edward Shann, “An economic history of Australia”, 1930, p 171.)

Second, export booms in Australia have in the past often been characterised by increased conflict over distribution of national income, even though they offered the prospect of widely-shared benefits through stronger economic growth. The prevailing ideology, from early in the 20th century until the mid-1980s, was that the wage fixing system – combining a centralised system for setting minimum wages and a system of pattern bargaining where wage increases in one industry quickly spread to others – should be used to distribute the benefits of prosperity being experienced in export industries. This led to a great deal of industrial conflict, higher inflationary expectations and higher unemployment.

Third, the difference in response to the 1930s depression in Germany and other industrialised countries seems to be largely attributable to differences in prevailing ideas or ideologies. The discontents of the1930s provided fertile grounds for radical ideas (including Keynesian ideas which weakened resistance to budget deficits and monetary expansion) in all industrialised countries, but in Germany the idea that the world was a dog eat dog kind of place had gained considerable academic respectability prior to the depression and the rise of national socialism. These ideas were evident, for example, in Werner Sombart’s identification of Jews with the elements of capitalism that he most despised – the calculative search for advantage that led to dissolution of the traditional way of life of the Volk. (See: Jerry Muller, The mind and the market, 2002, pp 253-255.) Another influential example was Hans Freyer’s view that individuals acquire a sense of meaning and purpose only from the particular culture of the Volk of which they were a part and that the state exists to assert the interests of the Volk through struggle against external threats (Muller, pp 276-287). Even though Hitler declared himself to be anti-intellectual, national socialism was widely supported within German universities.

The social consequences that follow from economic events depend to a huge extent on prevailing ideas about what those events mean.

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