Friday, February 21, 2020

Does democracy cause growth?



This question has contemporary relevance, but it came to mind as I was reading Mass Flourishing, by Edmund Phelps, who won the Nobel in economics in 2006. Mass Flourishing, published in 2013, is subtitled How grass roots innovation created jobs, challenge and change.

Phelps’ hypothesis:
Political institutions arguably played a significant role in the creation of the modern economy. One of these was representative democracy, which arose rather close to the emergence of economic modernity” (p 92).


That challenged my prior view that political change favouring economic freedom, innovation and productivity growth came first, and that voting rights came later to redistribute the fruits of economic progress.

Phelps recognizes that democracy involves downside risks (e.g. tyranny of the majority, interest group politics) but gives plausible reasons why democracy may have helped promote economic growth:
  • A democracy would push the public sector to support the interests of lower and middle classes, thus encouraging business activity (including grassroots innovation) and public education. By contrast an autocracy would tend to be more interested in serving landed interests, national prestige etc.
  • Rule of the people tends to lend credibility to rule of law, thus reducing sovereign risk.
  • Elected politicians have an incentive to heed voters, whereas autocrats may not even be aware of their interests or concerns.

However, in my view Phelps' line of argument runs into problems when he considers whether the mechanics of democracy occurred at the right time and place to trigger an explosion of economic dynamism. He looks at the experience of five countries: Britain, America, France, Belgium and Germany.

In respect of Britain, he refers to the revolution of 1688 as having given representation to new wealth and new cities, and the Reform Act of 1832 as extending the franchise to men without property. The Glorious Revolution didn’t establish democracy and the Reform Act was too late to be a trigger.

Phelps refers to the U.S. Constitution of 1788 as having created a government that was radically more representative than Britain’s parliament at that time. However, my American friends keep telling me that their Founding Fathers established a republic rather than a democracy.

The experience of France seems to support the hypothesis. Both democracy and dynamism were slow to arrive in France. The experience of Belgium was ambiguous.

German experience didn’t support the hypothesis. There was strong innovation in Germany in the latter half of the 19th century, but little democracy except at local levels.

Phelps’ conclusion suggests a smaller role for democracy than his original hypothesis:
“In any case, the reasonable inference is not that modern democracy caused the modern economy or vice-versa, but that both sprang from the same matrix of values and beliefs—the same culture” (p 96).

Joel Mokyr has emphasized the role of institutional adaptability, rather than democracy, in facilitating growth. He responds as follows to the observation that commercial energy was combined with stable rule by an exclusive elite in 18th century Britain:
Yet British institutions also had to possess a built-in capability to adapt to radically changing circumstances, and every such adaptation led to further changes in the economic structure of Britain. It is this kind of dynamic that created the success that allowed the growth of useful knowledge and technological ingenuity to become the foundation of sustained economic development” (The Enlightened Economy, 2009, p 427).

The adaptations that Mokyr refers to include the reform of many institutions that had supported rent-seeking and redistribution. He suggests that by 1850, “the elite that ran British government no longer saw political power as a means to acquire more privileges”, but instead “made sure that no other political group would be able to do the same so it could keep what it already had” (p 395).

As noted at the beginning of this post, the question of whether democracy supports economic growth has contemporary relevance. Bill Easterly’s examination of economic growth experience in his book, The Tyranny of Experts, (discussed here) suggests that political leaders matter very little for either good or ill in driving economic growth. He argues that freedom promotes individualistic values that favour economic development. By contrast, autocrats tend to promote the interests of the kingdom (or state) above those of the individual and foster collectivist values that are inimical to economic development. 

China’s experience of autocrats promoting limited economic freedom, which has resulted in a major growth dividend in recent decades, is interesting in that context. As in Germany in the latter part of the 19th century, the leaders of China may see a degree of economic freedom as a way to promote the interests of the state.

 Finally, as a matter of empirics, there is evidence that if you classify countries as either democratic or non-democratic and control for other factors, the democratic countries have better growth performance. In a recent study covering 175 countries, Daron Acemoglu et al have found that democratizations increase GDP per capita by about 20 percent in the long run [JPE, 2019, 127 (1)].

Unfortunately, those findings do little to allay my concerns about the impact of interest group politics on future productivity growth in the western democracies. I will write more about that, and about Edmund Phelps views of possible causes of declining dynamism, in a later post.

Monday, February 3, 2020

When and how did the concept of progress originate?



Are you one of those people who has not given up hope that following generations will have better opportunities than you have had? If so, you may be interested to know when and how such hopes came to be considered realistic.

If progress is defined very broadly in terms of hope for advancement of mankind, it is possible to argue, as does Robert Nisbet, that the concept has ancient origins:
“the Western idea of progress was born of Greek imagery, religious in foundation; the imagery of growth. It attained its fullness within Christianity, starting with the Church Fathers, especially Augustine” (Idea of Progress: A Bibliographical Essay by Robert Nisbet, 1978-79).

Augustine held that prior to Judgement Day, the blessed will know an earthy paradise.

However, that is probably not what you have in mind if you hope that following generations will have better opportunities. As Nisbet acknowledges, “there is almost no end to goals and purposes which have been declared the fulfillment or outcome of mankind's progress”.

The goals I have in mind relate to growth of opportunities for human flourishing – the pursuit and achievement of happiness in a worthwhile life. More specifically, as discussed in a recent series of posts, flourishing entails opportunities for individuals to have the basic goods of a flourishing human: wise and well-informed self-direction, the prospect of a long and healthy life, positive human relationships, psychological well-being and living in harmony with nature.  Hope for progress involves, among other things, an expectation that useful knowledge will continue to accumulate, and the material conditions of humanity will improve from generation to generation. In those terms, hope for progress isn’t necessarily associated with faith in the possibility of either an earthy or heavenly paradise.

J B Bury, the author of The Idea of Progress: An inquiry into its origin and growth (1921) viewed progress as movement of civilization in the direction of “an ultimate happy state … or of some state, at least, that may relatively be considered happy”. Bury’s emphasis on happiness seems appropriate, but the idea of “an ultimate happy state” seems inconsistent with the idea of ongoing progress.

I disagree also with Bury’s suggestion that “you have not got the idea of Progress until you … conceive that [civilization] is destined to advance indefinitely in the future”. Individual humans are destined to seek to advance their own happiness by reason of their human nature, but it doesn’t follow that civilization is destined to advance. Those who hope progress will be ongoing have a better grasp of the idea, in my view, if they acknowledge, with Karl Popper, that there are “conditions of progress” and “conditions under which progress would be arrested” (The Poverty of Historicism, 1957, p 142).

If we view progress in terms of the advance in useful knowledge and ongoing betterment of the material conditions of humanity, Bury’s claim that it is of comparatively recent origin seems correct. As noted by Joel Mokyr:
“A belief in future progress … requires an implicit model of what could have brought about such progress as well as evidence that such progress had happened in the past” (A Culture of Growth, 2017, reviewed here).

Mokyr argues that the relevant model - in which advances in useful knowledge came to be viewed as an engine of economic progress through improving production techniques - emerged in Europe in the 17th century.

French rationalists and advocates of liberte’

In Bury’s opinion, Bernard LeBovier Fontenelle “was the first to formulate the idea of the progress, of knowledge, as a complete doctrine”, in his Digression on the Ancients and Moderns (1688). Fontenelle argued that superior methodology, logical rigor and critical faculties enabled the science of the moderns to surpass that of the ancients. He also predicted that one day the current generation would themselves be ancients and their achievements would be surpassed by later generations.
Bury’s opinion of Fontenelle’s importance in the history of progress has been disputed, but Mokyr suggest that “although Fontenelle was no towering intellect”, “he was eloquent, well positioned, and influential”, and “part of an intellectual movement that reached its zenith with Condorcet” (p 262). 

Before we discuss Condorcet, mention should be made of Abbe’ Saint Pierre and Anne-Robert-Jacques Turgot. The Abbe’ widened the compass of progress to embrace progress toward social perfection. Bury notes that he “shared the illusion of many that government is omnipotent and can bestow happiness on men”.

Turgot viewed history as a record of human progress, advancing through periods of calm and disturbance toward greater perfection. Unlike some other French Enlightenment thinkers, particularly Voltaire, Turgot acknowledged Christianity as having been a powerful agent of civilization. He noted that the development of human societies has not been guided by human reason, but has occurred as a result of passion and ambition. Nisbet suggests that Turgot’s celebrated discourse, before an admiring audience at the Sorbonne in 1750, “probably” represented “the first full and complete statement of progress”. Mokyr observes that Turgot “seems to fall in the Candidesque error of thinking that almost any event in history, no matter how calamitous, led to progress in some fashion” (p 263). Mokyr’s judgement may be too harsh because Turgot’s laissez faire views on economics were apparently based on an appreciation of the mutual benefits of free exchange (see comments by Murray Rothbard).

The Marquis de Condorcet (known as Nicolas de Condorcet) was a supporter of the French Revolution, but his Sketch of a Historical Picture of the Progress or the Human Mind was composed after that, in 1793, during the Terror, while he was hiding from Robespierre. Condorcet viewed the history of civilisation as the history of enlightenment – he saw an indissoluble union between intellectual progress and the progress of liberty, virtue and respect for natural rights. Based on his analysis of history, he reasoned that humanity was on the cusp of a grand revolution toward a happy future. He seems to have viewed that outcome as inevitable, provided appropriate help was provided by people who wanted to be on the right side of history. He asked:
What can better enlighten us to what we may expect, what can be a surer guide to us, amidst its commotions, than the picture of the revolutions that have preceded and prepared the way for it? The present state of knowledge assures us that it will be happy. But is it not upon condition that we know how to assist it with all our strength?”

Bury notes that Condorcet’s “principles are to be found almost entirely in Turgot”, but “Condorcet spoke with the verve of a prophet”. As prophets go, Condorcet seems to have been successful. He predicted equality of the sexes, mitigation of inequality in wealth by means of education, economic development obliterating distinction between “advanced and retrograde races”, and advances in medical science increasing life expectancy. His prophesy of cessation of war has yet to be fulfilled, but if Steven Pinker is right, there may even be a trend in that direction.

Scottish moralists and economists

Nisbet recognises the importance of Adam Ferguson’s contribution in documenting the history of arts, sciences and institutions, without mentioning his most important contribution. Bury mentions in a footnote that Ferguson “treated the growth of civilization as due to the progressive nature of man, which insists on carrying him forward to limits impossible to ascertain” and “formulated that process as a movement from simplicity to complexity”.

Further explanation is required. Ferguson argued that “man is susceptible of improvement” because of “a desire of perfection” stemming from “the powers that nature has given”.  As humans strive “to remove inconveniencies, or to gain apparent and contiguous advantages” they “arrive at ends which even their imagination could not anticipate”. He suggests: “the forms of society are derived from an obscure and distant origin; they arise, long before the date of philosophy, from the instincts, not from the speculations of men”. His main point:
Every step and every movement of the multitude, even in what are termed enlightened ages, are made with equal blindness to the future; and nations stumble upon establishments, which are indeed the result of human action, but not the execution of any human design” (An Essay on the History of Civil Society, 1767).

Bill Easterly has noted recently that Ferguson used lack of intentional design to challenge the notion of innate European superiority leading to the right to coerce non-Europeans. He argues that superior group outcomes could not reflect innate superiority because those outcomes “arose from successive improvements that were made, without any sense of their general effect” (The Review of Austrian Economics, 2019).

Bury and Nisbet both recognize the importance to an understanding of progress of Adam Smith’s great work, The Wealth of Nations (1776). Bury notes that as well as a treatise on economic principles, The Wealth of Nations “contains a history of the gradual economic progress of human society, and it suggests the expectation of an indefinite augmentation of wealth and well-being”.
Smith’s well-known contributions on the gains from specialization and trade helped promote a broader understanding of economic progress, and of the potential for governments to hold it back. 

Although he didn’t present a complete model of technological progress, Smith also made an important contribution to understanding of productivity growth. Smith suggested that “the invention of all those machines by which labour is so much facilitated and abridged, seems to have been originally owing to the division of labour”. He observed that people are “much more likely to discover easier and readier methods of attaining any object, when the whole of their minds is directed towards that single object”. That observation anticipates Friedrich Hayek’s insights on the importance of specific knowledge and Edmund Phelps insights on the importance of grassroots innovation to the economic development process.

In my view, Smith’s account of spontaneous order, building on the insights of Adam Ferguson, represents his greatest contribution to an understanding of progress. Smith observed:
This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature, which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another”.

In his oft quoted passage about the “invisible hand”, Smith suggested that an individual pursuing his own commercial interests,
by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it”.

Smith viewed progress as an outcome of voluntary exchange process with potential for mutual benefit. Bill Easterly reminds us that The Wealth of Nations, which is most famous as a critique of zero-sum mercantilist thinking, is also a critique of zero-sum colonialist thinking. Smith was scathing in his criticism of the conquest of the Americas. He wrote:
“The savage injustice of the Europeans rendered an event, which ought to have been beneficial to all, ruinous and destructive to several of those unfortunate countries”.

We can’t turn back history and there is a limit to what can be done to compensate for the injustices of the past, but we should ensure that our personal views of progress are consistent with generation of mutually beneficial outcomes, rather than use of force to enable some to prosper at the expense of others.

Conclusion
Hope for progress involves the expectation that useful knowledge will continue to accumulate, providing growing opportunities for human flourishing, including opportunities for voluntary and mutually beneficial exchange. That concept of progress emerged in Europe in the 17th century and was fully developed in the 18th century. Thinkers who were important in developing the concept include Fontenelle, Turgot and Condorcet, in France, and Adam Ferguson and Adam Smith, in Scotland.

Saturday, January 25, 2020

How can the traditional virtues help people to have the basic goods of a flourishing human?



After setting out a few days ago to write about the origins of the concept of progress, I was re-reading portion of The Enlightened Economy, by Joel Mokyr, when my attention was diverted to the relationship between goodness and happiness. In discussing the meaning of the Enlightenment, Mokyr mentions Roy Porter’s characterisation of it as a gradual switch from asking ‘how can I be good?’ to ‘how can I be happy?’.  Mokyr suggests that pithy summary “captures perhaps something essential” (p 33). (Porter’s discussion is in The Enlightenment in England, 1981.)

I agree both with Mokyr’s endorsement and his equivocation. Darrin McMahon, in his book Happiness: A History (2006) noted the role of St Thomas Aquinas (1225 – 1274) in drawing renewed attention to the works of Aristotle and opening up a space in which some partial happiness can be achieved in this life.  Aquinas helped open the way for the subsequent attention given to betterment of material conditions of humanity by Enlightenment thinkers but, like Aristotle before him, he saw virtuous activity as providing the answer to human aspirations for both goodness and happiness. Many Enlightenment thinkers and, more recently, Neo Aristotelians, also see a strong link between virtuous activity and happiness.

The series of posts I have just completed about the basic goods of a flourishing human have obvious relevance to the question, ‘how can I be happy?’, but those posts don’t mention virtue explicitly. I could explain that in terms of the focus of those posts on societal institutions rather than personal development. However, my time could be better spent considering the role of virtue in helping individuals to attain the basic goods.

Ed Younkins comes to mind as a scholar who emphasises that human flourishing “comprises and requires a number of generic goods and virtues” whose proper application is unique to each person.
The role of the virtues in individual flourishing has been discussed at greater length by Douglas Den Uyl and Douglas Rasmussen in The Perfectionist Turn (2016). Those authors argue that the fundamental problem of ethics is taking responsibility for figuring out how to fashion one’s own life. Within the context of their template of responsibility, human flourishing is viewed as “the exercise of one’s own practical wisdom”. Integrity is the central virtue of that framework. The authors explain:
“Integrity expresses itself interpersonally in honor; but when applied to the agent herself, the term ‘integrity’ signifies a coherent, integral whole of virtues and values, allowing for consistency between word and deed and for reliability in action”.

Integrity explains how the basic goods, as I have identified them, are linked together as an integrated whole when a human is flourishing. Integrity is necessary for exercise of the wise and well-informed self-direction that, in turn, helps individuals to live long and healthy lives, maintain positive relationships, manage their emotional health, and live in harmony with nature.

Neera Badhwar, in Wellbeing: Happiness in a Worthwhile Life" (2014), offers a somewhat different perspective to that of Den Uyl and Rasmussen, but she reaches similar conclusions.  The central propositions Badhwar advances are that the highest prudential good (HPG) consists of happiness in an objectively worthwhile life, and that a person who leads such a life must be characteristically autonomous and reality-orientated.  

Although Badhwar’s view of happiness focuses on positive emotions, thoughts and evaluations, she emphasizes that the HPG also requires an objectively worthwhile life. She explains that an objectively worthwhile life must be “worthwhile for creatures with our needs interests and capacities – including the capacity for asking what sort of life counts as worthwhile”. Her view of an objectively worthwhile life incorporates external goods, such as wealth, to the extent that such goods are compatible with the ability of a person to use them virtuously and happily. It must therefore also incorporate the basic goods I have identified: physical health, positive relationships and living in harmony with nature, as well as psychological well-being and wise and well-informed self-direction.

Badhwar argues that virtue is of primary importance because it ensures the attitudes and actions that are necessary for happiness in a worthwhile life. She suggests that the integration of emotional dispositions with the practical wisdom required by virtue, “makes virtue highly conducive to happiness, since a common source of unhappiness is conflict between our emotions and our evaluations” (p 152). In other words, we can make ourselves unhappy by allowing transient emotions to distract us from acting in accordance with our values.

That brings us back to the importance of integrity to individual flourishing.

How does integrity relate to the traditional virtues of western society as they are understood in the modern world?
In considering that question I have consulted Deirdre McCloskey’s book The Bourgeois Virtues (2007).

Integrity isn’t listed specifically among either the four ancient cardinal virtues - prudence, courage, temperance and justice – or the three Christian virtues – faith, hope and love. McCloskey lists integrity as a sub-virtue of faith and, by listing honesty as a sub-virtue of justice, implicitly recognizes its connection to justice. However, integrity may be required for a person to acquire any of the virtues in a manner that is likely to enable her (or him) to do the right things, towards the right people, for the right end, and in the right way, and to take pleasure in so doing.

In order to explore that possibility, let us take a quick excursion to consider McCloskey’s perception of the virtues and what integrity involves in the context of each virtue.

Prudence (or practical wisdom):
McCloskey recognizes its importance, but is highly critical of the “prudence only” approach of schools of economic thought that have sought to equate individual flourishing with utility maximization.
In the context of practical wisdom, integrity implies reality-orientation, or a disposition to seek truth and understanding.

Courage:
McCloskey argues that courage needs to be balanced with temperance. She is somewhat critical of those who hold up the courage of ancient warriors as a relevant model for the modern world, but is also uneasy about the apparently lack of courage displayed by those in charge of a peace-keeping mission in Srebrenica in July 1995. She admires the courage of those who undertake new ventures and overcome fear of change.
Integrity helps people to act with the courage of their convictions.

Temperance:
McCloskey points out, for the benefit of confused psychologists, that it is temperance, not prudence, that is the virtue of controlling impulses. She notes that temperance is required to listen to customers and avoid temptations to cheat, as well as to save and accumulate wealth.
It is relatively easy for a person to decide to become more temperate in some contexts, but integrity is required to stay on course.

Justice:
McCloskey notes that just conduct involves, among other things, respect for property honestly acquired, paying willingly for good work and breaking down privilege.
Integrity is closely connected with justice, because both integrity and justice require individuals to be honourable and trustworthy in their dealings with others.

Faith:
McCloskey suggests that the relevance of faith is not confined to people who have religious beliefs. In support, she quotes Stephen Barr, a physicist, who suggests that when we ask questions about the real world, we have faith that those questions have answers. She also explains the connection between faithfulness and integrity, in the context of adhering to one’s commitments. She notes the Aristotelian tradition of ethics as a matter of habit and character, and Adam Smith’s account of the role of the impartial spectator, as a behaviourally instilled internal voice of conscience.  
It seems to me that integrity is also required as mature individuals exercise their personal responsibility to decide whether an annoying spectator, that was installed within as a default setting during their childhood, is consistent with their own values.

Hope:
McCloskey writes: “Hope is of course essential for eternal life, and for humdrum life, too, as one can see from the lethargy that comes over a human who, as we say, ‘has nothing to look forward to’.” Hope involves expectation as well as a wish for something good to happen.
Integrity helps steer us toward realistic optimism and away from the hazards of wishful thinking.

Love:
McCloskey is critical of major schools of thought within economics that have viewed love in the same way as other goods, by putting the beloved’s utility into the lover’s utility function, along with ice cream etc. She points out that this implies prudence only, and is contrary to the approach of Adam Smith, the founder of economics, who recognized that people seek a balanced set of virtues, including love. Smith wrote approvingly about benevolence and of “the great law of Christianity” requiring us “to love our neighbour as we love ourselves” Theory of Moral Sentiments, 1759, 25 (5).
Integrity is required to ensure that love offerings are made with a pure heart and not subsequently confused with obligations for provision of reciprocal benefits.

Bottom line
Traditional virtues can help us to be both good and happy, but we require integrity if we are to do the right thing, at the right time, and for the right reasons.

Tuesday, January 14, 2020

What determines opportunities for humans to flourish?



A series of recent articles on this blog has shown that some societies offer better opportunities than others for individuals to have the basic goods of a flourishing human. My aim in this post is to draw threads together to provide an overview of the links between the basic goods and determinants of opportunities to have those goods.

First, I will recap how the basic goods were identified.

Criteria
As explained in the first article in the series, I have adopted the criteria for the basic goods of “the good life” used by Robert and Edward Skidelsky: 
  • Universality: not specific to eras or cultures;
  • Finality: not just serving as a means to a more basic good;
  • Sui generis: not incorporated in some other good;
  • Indispensability: lack of the good leads to loss or harm.

Those criteria were developed by Skidelsky and Skidelsky in their book How Much is Enough (2012). Those authors also presented a list of basic goods that I used as a starting point for thinking about the items that should be regarded as basic goods.

The basic goods that I think a flourishing human could be expected to have are:
  1. The prospect of a long and healthy life.
  2. Wise and well-informed self-direction.
  3. Positive relationships with family, friends, colleagues, acquaintances and trading partners.
  4. Psychological well-being: emotional stability, positive emotion, satisfaction with material living standards, engagement in doing things for their own sake and learning new things, perception of life as meaningful, a sense of accomplishment, optimism, resilience, vitality, integrity, and self-respect.
  5. Living in harmony with nature.
I think my list is comprehensive and have given reasons why I think the items included on it are basic goods. Nevertheless, my perceptions of what it means to be a flourishing human are not incontrovertible.

Some items on this list could be grouped together. Longevity and psychological well-being are both aspects of health. Positive relations with other humans and living in harmony with nature are both aspects of relationships with other living things. However, I think the differences between the items concerned are large enough to warrant separate listing.

Links between the basic goods
The chart shown at the beginning of this post suggests that the basic goods are linked together as an integrated whole when a human is flourishing.

Wise and well-informed self-direction is of central importance. As discussed in the post on that topic, self-direction helps individuals to maintain other basic goods that are necessary to their pursuit of chosen goals.  The exercise of practical wisdom helps individuals to live long and healthy lives, maintain positive relationships, manage their emotional health, and live in harmony with nature.

Psychological well-being depends heavily on other basic goods. As noted in the post on psychological well-being, much of the international variation in life satisfaction scores can be explained by factors that are closely related to other basic goods that a flourishing human could be expected to have. 

The causal link between psychological well-being and self-direction runs in both directions. Sanity is necessary for wise self-direction.

The prospects for people to live long and healthy lives have always depended on living in harmony with nature. That is true even in the modern world. For example, the severity of damage resulting from bushfires recently experienced in Australia may be attributed to failure to have enough regard to living in harmony with nature. In addition to the immediate threat to life posed by the fires, may people have been adversely affected by smoke, which includes particulates that can be detrimental to long term health.

Determinants of opportunities to have the basic goods
Conclusions of the posts relating to each of the basic goods are outlined below.
  • Wise and well-informed self-direction: Individuals have strong incentives to learn how to make wise and well-informed choices in societies where there is a great deal of economic and personal freedom. They are likely to have easier access to relevant information in countries with relatively high skill levels.
  • The prospect of a long and healthy life: Health spending, income growth and education have contributed substantially to increased longevity. The more fundamental determinants are the cultural and institutional factors that have contributed to economic development, including economic freedom. Long healthy life expectancy is associated with high levels of economic and personal freedom.
  • Positive relationships with other humans: The extent to which others can be trusted has an important impact on the opportunities for positive human relationships because it improves incentives for trade and other mutually beneficial activities. Trust levels tend to be higher in countries with relatively low crime rates and adherence to rule of law. Generalized trust, which gives greatest weight to trust of people who have just met and people from different religions and nationalities, tends to be greatest where people hold emancipative values, involving greater tolerance of diversity. Networks of individuals who can rely on each other for social support tend to be strongest in high-income countries.
  • Psychological well-being: Countries with the highest average life satisfaction are characterised by relatively high income levels and life expectancy, accompanied by perceptions of strong social support, freedom and low corruption. The percentage of the population who are dissatisfied with life tends to be relatively low in such countries.
  • Living in harmony with nature: The sense of kinship that people feel toward some animals living in the wild is similar to their feelings toward household pets. Human reasoning seems likely to continue to expand this sense of kinship to encompass more living things. Rising incomes make people more willing and able to afford more humane treatment of animals.

Common elements among determinants
The most pervasive common elements among the determinants of opportunities to have the basic goods are high incomes and high levels of economic and personal freedom.

The pervasiveness of high incomes as a determinant of opportunities for human flourishing points to the importance of economic growth. I have recently argued that it seems likely that for the foreseeable future the aggregate outcome of choices freely made by individuals as consumers and producers of goods and services will continue to involve further economic growth, even in high income countries.

However, it is possible that, over the longer term, increasing numbers of individuals will choose a lifestyle involving stable incomes and more leisure to one with rising incomes. Such an outcome would be consistent with ongoing growth of opportunities for individuals to live the lives that they aspire to have.

Once we recognize that economic growth is only one possible outcome of personal choices in the context of expanding production and consumption possibilities, that opens the way for us to focus on the determinants of productivity growth, rather than GDP growth outcomes. The cultural and institutional factors that have led to economic growth in the past have potential to continue to raise productivity levels, and thus enable opportunities for human flourishing to continue to expand, even if aggregate demand for goods and services does not continue to grow.

Cultural and institutional factors that support individual self-direction and opportunities for mutually beneficial exchange and cooperation are important not only in enabling people to make effective use of known technology, but also in bringing about improvements in skills, innovation, technological progress and advance of knowledge that enable productivity growth to occur.

Important institutions supporting the ongoing growth of productivity include liberty and rule of law. Individuals need liberty in order to exercise self-direction, and they need trustworthy trading partners and collaborators to engage with for mutual benefit. The perception that others can be trusted is enhanced by widespread adherence to rule of law. Culture is directly important in supporting the advance of knowledge, respect for innovators, and tolerance of diversity. Culture also underpins the values supporting liberty and the rule of law.

 Conclusions
Wise and well-informed self-direction is of central importance among the basic goods of a flourishing human because it helps individuals to maintain the other basic goods. The exercise of practical wisdom helps individuals to live long and healthy lives, maintain positive relationships, manage their emotional health, and to live in harmony with nature.

At a societal level, liberty and rule of law are among the most important determinants of opportunities for individuals to have the basic goods of a flourishing human. That poses the question of why there is greater liberty and adherence to rule of law in some societies than in others.  In order to understand the determinants of opportunities for human flourishing we need to understand the evolution of cultures supporting liberty and the rule of law.

Tuesday, January 7, 2020

"How dare you?"



I have stopped laughing about Greta Thunberg’s performance at the United Nations a few months ago.

At the time, I was amused by her quixotic antics in attacking world leaders. People who think they can change the world by staging tantrums do not deserve to be taken seriously. It was predictable that Greta’s outburst would have a negligible impact on climate change policies.

I was also amused by Greta’s misconceptions about the relationship between economic growth and climate change.

On reflection, however, those misconceptions are no laughing matter. They are more widely held than I had imagined, including among some people who have had a great deal more education than Greta. By making economic growth the villain, climate activists seem likely to antagonize many of the people who would like more action to be taken to reduce greenhouse gas emissions.

Global climate change is perceived to be a serious problem by a high proportion of the population in many different countries. However, there is much less support for action to be taken to limit greenhouse gas emissions. The obvious obstacle is the additional cost to consumers of transition to alternative energy sources (including the cost of energy storage and backup to ensure reliable supplies). The advocates of zero economic growth add another obstacle by telling people they will have to make huge changes in their lifestyles to mitigate climate change. The lifestyle changes required for adaptation may seem preferable to many people.

The nature of economic growth
Misconceptions about the relationship between economic growth and climate change stem largely from ignorance about the nature of economic growth.

When economists talk about economic growth, defined as an increase in the amounts of goods and services produced, some environmentalists just think of increases in the amount of stuff they don’t like. A little further thought might enable them to acknowledge that much additional stuff is being produced these days under environmentally friendly conditions. They might even be particularly fond of some additional stuff e.g. organic food, solar panels, electric cars and batteries. There are also some services they might like, such as health and education. 

Greta and her followers are probably concerned that economic growth requires us to dig up more and more natural resources until there are no more to be discovered. If that was true, it would be easy to understand why they might see endless economic growth as a fairy tale. However, growth in capital stock - created by transforming natural resources into equipment, buildings and infrastructure - typically accounts for only a small proportion of economic growth. In the 1950s, research by Robert Solow, a Nobel prize-winning economist, showed that only one-eighth of the increase in gross national product per man-hour in the United States between 1909 to 1949 could be attributed to increased capital stock. The remaining seven-eighth, which became known as the Solow residual, was attributed to technical change. Subsequent research has shown part of the Solow residual to be associated with improvement in labour skills, with the remainder, often described as total productivity growth (or multifactor productivity growth) being attributed to innovation, technological progress and the advance of knowledge.

Economic growth will probably end one day, but there doesn't seem to be anything inherent within the growth process that must bring that about. How do Greta and her followers propose to end economic growth? Do they propose to require people to take the benefits of technological progress in the form of more leisure, rather than more goods and services? Or do they propose to stop the advance of knowledge and innovation? 

The former approach seems more likely. It is certainly not unprecedented in human history for the advance of knowledge to come to a virtual standstill for long periods. However, it would be surprising to see the environmentalists of wealthy countries advocate policies to make that occur.

Environmental impacts of growth
If economic growth is largely about innovation, technological progress and the advance of knowledge, does it necessarily have adverse environmental impacts?  Of course not! In recent years, a significant amount of research, development and innovation has been directly related to development of alternative energy or other environmentally friendly activities.

Much of the other innovation that has occurred over the last decade or so - for example, improvements in communication technology - seems to have been benign in terms of its environmental impacts. It is possible to think of technological innovations that have raised environmental concerns, e.g. fracking and genetically modified crops, but that could hardly justify the blanket ban on innovation that is implicit in a zero economic growth scenario.

My view of growth
At this point some readers might have gained the impression that I am an advocate of endless GDP growth. That is not so. My reservations about GDP as a measure of well-being, and of GDP growth as a societal objective have been on display in articles I have written over the past 15 year (for example one on the priority given to economic growth in Australia, and one on the concept of Gross National Happiness).

As discussed previously on this blog, I advocate growth in opportunities for human flourishing - that is, growth of opportunities for individuals to live the lives that they aspire to have. If increasing numbers of individuals choose a lifestyle involving stable incomes and more leisure to one with rising incomes, I can see no reason to object (unless they want me to subsidize their lifestyle choice). In my view, there is certainly no case for governments to require or induce people to work harder or longer to foster growth of GDP.

However, it seems likely, even in high income countries, that for the foreseeable future the aggregate outcome of choices freely made by individuals as consumers and producers of goods and services will continue to involve economic growth. That outcomes seems likely, even in the presence of the minimal restrictions on individual freedom are necessary to achieve widely accepted environmental goals.

Those who urge the introduction of policies to stop economic growth are contemplating a great deal more interference with the rights of individuals to manage their own lives than could possibly be justified to pursue widely accepted environmental goals.

Bottom line
Despite substantial reductions in the cost of alternative energy that have occurred over the last decade or so, the cost of transition to alternative energy still seems to be a major obstacle to effective international action to reduce greenhouse gas emissions. Those who make the false claim that economic growth is incompatible with widely accepted environmental objectives are adding a further obstacle to effective international action.

Instead of frightening people by urging governments to impose huge changes in lifestyles on citizens, perhaps environmental activists could pursue their goals more effectively by making a case for further government funding of research to help make alternative energy more affordable.