Introduction by Father Small
FATHER SMALL: Well, good afternoon, everybody. My name is Father Andrew Small. I'm from the U.S. Conference of Catholic Bishops and I've been called upon to moderate or preside over our session this afternoon and the very interesting discussion, I hope, that will follow. The book is by Professor Benjamin Friedman, The Moral Consequences of Economic Growth. I'm sure everybody has their copy right now and he'll be available to sign your copies and dedicate them to your firstborns and children after the session.
Professor Friedman is the William Joseph Maier professor of political economy at Harvard, expert on macroeconomic theory and policy. His book, Day Of Reckoning: The Consequences of American Economic Policy under Reagan and After, received the George S. Eccles Prize, awarded annually by Columbia University for excellence in writing about economics.
Next to me is Sebastian Mallaby who is the editorial writer and columnist for the Washington Post. His column appears on Mondays, as I'm sure many know. He joined the Washington Post editorial page in '99 after 13 years with The Economist. He's the author of the much-read and much-talked-about book, The World's Banker: Story Of Failed States, Financial Crises and the Wealth and Poverty of Nations, about The World Bank and its former president, Mr. James Wolfensohn.
Nigel Ashford, next to Professor Friedman, is the senior program officer at George Mason University's Institute for Humane Studies. He joined IHS from the United Kingdom where he was a professor of politics and the Jean Monnet scholar in European integration at Staffordshire University England. He's the recipient of the International Anthony Fisher Trust Prize for published work, which strengthens public understanding of the political economy and free society.
At the end of our table is Simon Johnson, the Ronald A. Kurtz Professor at the Sloan School of Management at the Massachusetts Institute of Technology. He's done path-breaking research on the role of institutions in supporting or hampering economic growth. His PhD is in economics from MIT with a BA from University of Oxford and an MA from the University of Manchester.
And before I hand over to Professor Friedman, just one comment. You might see there are almost all Brits or original Brits on this panel with Professor Friedman, who tells me he's very sympathetic to Brits since he did some of his major work at the University of Cambridge a few decades ago. I always feel that when this many Brits get together close to the White House, I'm sure the Secret Service gets a bit nervous for fear that there's a bonfire looming.
Professor Friedman, please.
Ben Friedman's remarks
PROFESSOR FRIEDMAN: Thank you, Father, for that kind introduction and I appreciate your mentioning the international character of the panel. Father Small, above all people, will understand why the sun never sets on the British Empire. God would certainly never trust those people in the dark.
FATHER SMALL: We're on.
Father Small, Mallaby, Friedman, Ashford, Johnson
PROFESSOR FRIEDMAN: I'm also very grateful to Father Small for holding up the copy of the book. I'll share with you a brief story that comes, not directly from my experience but from my close friend, Dan Yergin, who shared an editor with me at Random House years ago. The editor of my Day Of Reckoning book, which Father Small mentioned, was the same editor that Dan had on his first book on the energy crisis, maybe 25 years ago. Dan relates that he and our editor were having a conversation shortly before he, Dan, was about to go on television for the first time to talk about the book. Being rather nervous about this, Dan asked our editor: "Well, what do I do if they ask me a question and I don't know the answer?" And our editor replied: "Dummy. It doesn't make any difference what you say. Just make sure they hold up the book."
So, Father, thank you very much for that vote of confidence in me. I appreciate that very much.
I also want to thank the nice people at the IMF for laying on this marvelous meeting. I'm delighted to be here and to have an opportunity to say something to this large and distinguished audience about not just the book per se but the ideas that I advance in the book.
I think the best way to frame this discussion is to pose a question which may sound rather strange at the beginning but one that I think we need to take rather seriously. That is, why do we, and why should we care about economic growth? Why should this be a priority for us? And let me make clear that by "we" in these questions I mean those of us who are privileged to live either in the United States or in Western Europe or in Japan, or in other of the world's relatively affluent, advanced, industrialized economies today.
The reason I pose the question in that particular way is that, as I hope people are aware, for all too many of the world's citizens today, living in all too many countries, advances in material living standards translate very immediately into improvements in the basic human dimensions of life — things like how long do people live, what diseases do they suffer, what is their probability of dying from those diseases, what fraction of their children are going to die in infancy, what fraction of their adult fellow citizens will be malnourished.
So if the "we" were three-fourths of the world's population, then I think the answer to the question of why do we care about economic growth and why should we make economic growth a priority would be very immediate and very obvious.
The truth of the matter is, however, that above income levels that are roughly half, even less than half of what we enjoy in the United States, virtually all of the relationship between improving living standards and improvements in such matters as longevity or morbidity or infant mortality, has pretty well played itself out.
So to take just two examples, one from Europe and one from Asia, Portugal today has a standard of living approximately half what we have in the United States. I picked Portugal because that is the low end, economically, of the Euro 15. But the Portuguese live just as long as we do, they have no more morbidity or infant mortality than we do. The Portuguese enjoy virtual universal literacy the way we do. So anything to do with these basic human dimensions of life can't be what it's about.
Similarly, to take an example from Asia, the Koreans, by which I mean South Koreans, enjoy a standard of living in material terms roughly 40 percent of what we have in the United States. They too live just as long as we do, have just as low infant mortality, have the same morbidity experience.
So it has to be something beyond that. The answer that I suggest in the book is rather an answer that speaks to the social, the political and ultimately, to use the 18th Century word from which I draw many of the ideas in the book, the moral character of the society.
To be more specific, the idea that I advance is that when the broad bulk of a society's citizens are enjoying an improvement in their material standard of living, that is the circumstance under which the society is also able and likely to make progress in other dimensions of its life, and dimensions that Western thinking, at least since the Enlightenment, has regarded not only positively, but positively in explicitly moral terms.
Now what do I have in mind? I have in mind, in the first instance, the provision of opportunity. Are the people who are allowed to get ahead only the sons and daughters of those who already occupy the top positions in society? Or is opportunity made available more broadly to people who are willing and able to take it up?
I have in mind, secondly, tolerance. Tolerance with respect to what? Well, as an American, I would immediately think of race relations. I would immediately think of attitudes towards immigrants. I also have in mind religious prejudice and other dimensions of tolerance.
Here, too, the argument is that circumstances under which the bulk of a society's citizens are moving forward in their material standard of living, know they're moving forward and have confidence that that forward progress will continue into the future, is also the circumstance under which tolerance will expand.
I have in mind fairness. After all, providing opportunity is one thing but we know—that's part of the definition—we know that not everybody will be able and not everybody will take up the opportunities that are offered. So the question is what does the society do with respect to those who haven't? What is the provision for the disadvantaged in society? Here, too, I argue that there is a relationship with the improvement of the material standard of living of the rest of society.
And then the final element of what I have in mind is democracy. In the advanced industrialized countries where democracies already exist, the issue is the strength, or lack thereof, of existing democratic institutions. Bur elsewhere in the world, the issue is not strengthening democratic institutions that already exist, but rather, creating democracies to begin with out of institutional structures that are completely different.
So the hypothesis, to put it very simply, is that improvements in the material living standard of the broad bulk of the population sets the stage for improvements also in these moral dimensions of a society. Conversely, whenever the bulk of the population in a society has the sense that there is no forward progress in its material living, or worse yet has the sense not just of stagnation but of retreat, that also is the setting of the stage for retreat and retrenchment, or worse, in these moral dimensions of the society's character as well.
Now I'm eager to hear what my three discussants, and Father Small as well I hope, will have to say about this idea, but before moving forward, I would like to indicate four implications that I believe follow from this hypothesis, if it is true.
The first implication is an extremely optimistic one. If it is true that what matters is not just how rich a society is but also whether the bulk of its citizenry has a sense of moving forward in its living standard, then I believe many countries throughout the developing world will not have to wait until they achieve Western standards of living before they move significantly in the direction of liberal democracy (with a small `l' and small `d').
Take the example of Korea, which I mentioned a moment ago. Many people are unaware, incidentally, that at the time of the partition, more than half a century ago, what we now call South Korea was in fact the poor part of Korea. The industry was in the north and therefore that was considered the more affluent part. As recently as 1960, South Korea had a standard of living that was virtually negligible in Western terms. Over the course of a half century, from then until the mid to late '80s, the Koreans mounted a remarkable trajectory of economic growth that took their standard of living up to something like a quarter to a third of what were the then prevailing standards in the West.
With a delay of ten or so years, there was another quarter century during which the Koreans evolved politically from what had been a one-party military dictatorship under Syngman Rhee into what Korea is today, namely a well-functioning liberal democracy with a relatively free press, relatively broad political freedoms, and the kind of society that thinkers from Montesquieu to Locke to Adams to Jefferson would have recognized as democratic in form.
I argue that this is not an accident and I have the view, if the hypothesis that I'm suggesting today is right, that many other countries will also be able to trace out that path.
To take the one obvious example that I suspect will also be on many people's minds, what about China? Here at the IMF, I assume everyone knows that over the most recent quarter century, the Chinese have mounted the fastest sustained economic growth in the world, 7 percent per annum in per capita real terms. This means that the standard of living is doubling once every ten years. Now there is already some improvement in China. Chinese now have the freedom to decide where they want to work, in many cases where they want to live. Do they want to start a business? Would they like to hire people to work for them? None of this was true when I first started visiting China 25 years ago. The Chinese also now have some semblance of democracy at the village level. There are actually contested village elections, which incidentally, in a society with more than 700,000 villages, is no small thing. But at the national level, as we all know, China remains what Korea was 50 years ago.
I would be optimistic that within our lifetimes, if the Chinese continue to move along the economic growth trajectory that they have achieved, and importantly, if the bulk of the population participates in the fruits of that growth, then China as well, even at the national level, will move toward liberalization and democratization.
If this sounds like an optimistic point of view, that is because it is. The hypothesis that I'm suggesting, relating moral progress to material progress, is very much a line of thought that grows out of the Enlightenment tradition, which has always taken its own strength from a kind of a robust optimism about the human enterprise, and I think the hypothesis I'm suggesting has many optimistic overtones to it.
The second implication I'd like to draw, however, is rather sobering. If what matters for these purposes is not just how rich a society is but the sense of forward progress, or lack thereof, of the broad bulk of the citizenry, then no society, no matter how rich, is ever immune from seeing its basic democratic values at risk.
Now this is a very sobering thought today, especially for Americans. As I hope people are aware, we have just finished what I think will turn out to have been the sixth year in a row in which the median income in the United States failed to keep pace with inflation. The total GDP of course is expanding very nicely. But the fruits of the gains from that increased production have been sufficiently skewed over this period that the average American's living standard is not even keeping pace with inflation. We know that that was true through 2004. We don't have data yet for 2005 but it's a pretty good guess that 2005 will be the sixth year in a row.
Now this is a very daunting and, as I say, sobering thought, because not just in the United States but in many of the advanced democracies in the past, periods when people have lost the sense of forward progress have translated into either no progress or real retreat, often with disastrous consequences, in many of the dimensions of moral character that I have just described.
In the interest of time, let me pick only one example, and I'll pick one that's perhaps on many people's minds today, because not just of the importance for America but also because of the recent unfortunate experience in France. That is, I'd like to say something about attitudes towards immigrants.
In the book, I go through a repeated series of questions that take the following form. Why did the United States have the wave of anti-immigrant violence that we had in the 1850s? Why did it then go away, which it did, after the Civil War? Why did we then have the return, not of violence, so much as just very ugly anti-immigrant agitation in the 1880s and 1890s, and then, after the turn of the century, by which I mean the 20th Century, why did that then give way to an attitude of welcoming and Americanizing large numbers of immigrants?
And incidentally, it's worth pausing to say that often these social movements have consequences that range well beyond the narrow confines of the situation under discussion. One of the outgrowths of the welcoming and Americanizing of immigrants in the early years of the 20th Century was universal high school education. The idea then was that if we were to welcome large numbers of immigrants but also Americanize them, well, there had to be some vehicle, some mechanism for making that happen and the chosen mechanism was high school education. Although the United States had pioneered universal grammar school education early on in the 19th Century, as of 1900 only 3 percent of Americans had graduated from high school. But very rapidly, after the turn of the 20th Century, communities all over the United States, but especially in areas that welcomed large numbers of immigrants, put in place high schools and also, incidentally, high schools with social studies curriculums, for just this purpose. Before 1900, nobody had ever heard the term `social studies'. So there are aspects of these movements that go well beyond mere prejudice or lack thereof.
To move forward with the story, why, then, in the 1920's, did the United States have legislation that was not only the most restrictive, quantitatively, but also the most discriminatory anti-immigrant legislation we've ever had in this country? The 1924 bill was actually called the National Origin Act. What that meant is that if you are coming from northwestern Europe that was fine, but if you were Italian or Greek or from the Balkans this was bad. If you were coming from Poland or Russia, this was very, very bad. The quotas were very much aligned with issues of the religious prejudice of the day.
Moving yet further forward in the story, why were the national origin acts completely thrown out in legislation in the late '50s and followed in the 1960's by the great liberalization of American immigration policy? And then why, in the late '70s, and all through the '80s, and into the early '90s, did we have pushback on immigration, things like Proposition 187 in California and movements in Texas and Florida to bar even legal immigrants from receiving benefits of various kinds? And then why, in the mid to late 1990's, did all that disappear to such an extent that the one candidate who chose to run for president in 2000 on an explicitly anti-immigrant platform, namely Pat Buchanan, got so few votes in the Republican primaries that he had to change parties?
Now it would be foolish to pretend, and I don't, that every twist and turn of immigration policy over this span of 150 years in the United States, was narrowly anchored in the underlying economics of growth versus stagnation. But I argue that it would be even more foolish to pretend that the underlying economics had nothing to do with it.
Think about in an American context. When did women get the vote? When did blacks get the vote? When did blacks really get the vote? There was, after all, a 95 year difference between the de jure event and the de facto event.
In each of these cases, one can see something of the underlying economics of stagnation versus growth at work, and to repeat, for an American, realizing that we've now had six consecutive years of the median income in our country failing to keep pace with inflation, this is a very sobering thought.
The third implication of the hypothesis I'm suggesting is one for public policy. One frequently hears, among economists anyway, that the right rate of growth for an economy is the market determined rate of growth. Families, left to their own devices, will decide how much to save. Firms, left to their own devices, will decide how much to invest. And through this wonderful process that people like me take great delight in explaining to every year's new crop of economic students, this combination of the families deciding how much to save and the firms deciding how much to invest will determine a rate of growth. Then, so the story often goes, because it is the market-determined rate of growth, it is then supposed to be the optimal or the best or the right rate of growth. A strong implication of the hypothesis I'm suggesting this morning is that that's not right, and the right rate of growth for a society is faster than the market-determined rate of growth. The argument I think is one that, for this audience at least, should be very easily understandable. It's just like the pollution argument but in reverse. We all understand that the market, left to its own devices, will over-provide things like pollution and congestion and noise. Why? Because I, as an individual, have no reason to take into my internal economic calculus the effect on other people of whatever is coming out of the tailpipe of my car. Therefore there's a role of public policy in saying we're going to make a collective decision to have catalytic converters on the tailpipes rather than leaving it to every individual.
The argument here is just the same but with the sign reversed. Because we value tolerance and democracy, and fairness and opportunity in moral terms, not in market terms, there's no way for the firms deciding how much to invest and the families deciding how much to save, to take those effects of economic growth, in the aggregate, into their private economic calculus. And as a result, to the extent that we value tolerance but there's no place we can go buy and sell it, and we value fairness but there's no place we can go observe a price on it, then the families will save too little and the firms will invest too little. As a result the rate of growth will be too low and therefore there is a positive role for public policy to stimulate the rate of growth to be faster than what the market, left to its own devices, would provide.
Now the final implication of this hypothesis is one that I think speaks fairly directly to the mission of the IMF, and I think it should be of particular interest here. It is that to the extent that material gains in our living standards also bring improvements in a society's tolerance and fairness and democracy, then there's something seriously deficient about the way in which we talk about economic growth in our public conversation. What I have in mind is that, in many people's approach to the subject, evaluating economic growth and the policies that either spur or impede economic growth, is a matter of evaluating the purely material advantages of growth versus the disadvantages, most obviously environmental degradation but other things as well, to which we attach a moral overtone.
So people think it's a matter of `material only' advantages versus `moral only' disadvantages. People come away from this conversation with a view that their self-image is supposed to map into whether they're for economic growth or against growth. Am I a person who mostly cares about material things? Am I a person who more emphasizes moral concerns? I'd say the broadest and most significant implication of the hypothesis I'm suggesting is that this way of thinking about the issue is wrong. That's the wrong way to evaluate issues related to economic growth. It's the wrong way for people think about whether they should be in favor of growth or opposed to policies that would produce growth.
The point is that there are very important aspects of the economic growth process, that to repeat, Western thinking for more than 250 years, has regarded as not only positive but positive in moral terms, and the thinkers I mentioned before-Locke, Montesquieu, Adams, Jefferson, Lincoln-said it far better than I could. These are the issues that we care about for the moral character of our society, and to the extent that economic growth helps enhance our ability and our willingness to move forward in that regard, then I think taking that into account will not only enable our public conversation about growth to get it right, which as an intellectual matter is of course important, but also make it more possible for countries, not just this one but many others as well, to move forward toward genuinely growth-enhancing policies. Thank you very much.
FATHER SMALL: I think perhaps over the past several hundred years that you've alluded to, post-Enlightenment, one of the pitfalls we've fallen into is to compartmentalize. But if you read this book, as I've had a chance to look through, there's a great integration of history, and economic history, and the great thoughts of the great philosophers that all come together. We often tend to read separate books on political history and economic history, and this is a great contribution to be able to bring that together in one conversation. Now to offer his reflections, Sebastian.
Sebastian Mallaby's remarks
MR. MALLABY: Let me begin by saying that this book is very good and you should read it. It's an intellectual delight.
PROFESSOR FRIEDMAN: You can stop now.
MR. MALLABY: It's a terrific blend of different disciplines, going well beyond economics, to describe this interrelationship between growth, on the one hand, and, on the other, social attitudes and political and religious currents. So you get passages not just on Adam Smith but also on Calvin—not Calvin and Hobbes, the other Calvin.
You've got, you know, disquisitions into the thinking of Macaulay and Tennyson, and then Edith Wharton, and so on.
Mallaby and Friedman
So there's this mixture of things. He brings in also, for example, American Supreme Court jurisprudence, describing the way that slow growth in the 1880s was one of the factors underlying the re-imposition of segregation in the American South, or it, culminating in the segregationist Supreme Court decision of Plessy v. Ferguson in 1896. But then the effects of the growth that then began around the same time as Plessy v. Ferguson changed the social tenor of the United States, bringing out a more tolerant and open attitude, so that by 1917 the Supreme Court was striking down a segregationist residential statute in Louisville, Kentucky. All of this is woven together and it makes for a great and enriching read.
Now, the book's thesis is basically an attack on the idea that morality and materialism are at odds. On the contrary, says Professor's Friedman, they can reinforce one another. I don't need to go over that again since he's already described it, but I will make a few observations about it.
One is that I think it's sort of revealing that this book is being published now. Think of a future Professor Friedman, writing a book a hundred years from now about the way that thinking has evolved, and tracking the history of these two views of the impacts of growth relate to the intellectual zeitgeist. I suspect he will cite Professor Friedman's book as the outgrowth of a period in which in the U.S. you had stagnation in the median income for most of the time since the 1970's, leading some people to say that growth is in fact not what we want to target because it doesn't seem to be helping ordinary people, and others-imaginative advocates of growth like Professor Friedman-making a counter argument that we do want to advocate it for the thoughtful and profound reasons that he has just provided. So just because median incomes haven't gone up, we shouldn't be giving up on the whole idea of growth. But we need to have a growth that does affect median income.
So the first thing to be said about this book is it is very much I think of its time. Look at the writing of Professor Layard, a prominent figure in the London School of Economics—we've got four Brits here so invoking him makes a fifth one, in absentia-and also now influential within the Tony Blair Labour Party. He published about a year or two ago a book called The New Science Of Happiness, summarizing this `happiness' literature which I'm sure many of you are aware of. It says that we don't observe, when we survey people, any sign that they say they are happier when they are richer. So what's the point of all this targeting of GDP?
In fact, Professor Friedman's pollution analogy is used by Professor Layard in almost the opposite way. Extra growth would have an externality of a more morally tolerant and open society in Professor Friedman's formulation. But in Professor Layard's formulation, hard work, which is one of the inputs of course into growth, is like pollution — not the opposite of pollution but similar to pollution.
Why? Because if I work hard, then my neighbor has to work hard too, in order to keep up, and if he falls behind, he will feel unhappy. So my working hard has this norm-creating effect of forcing everybody else to work hard, so that we arrive at a terrible equilibrium where we're all working too hard and we're all stressed out. If we could only just, you know, calm down and all cut our working hours we'd all be happier.
So the similarity between Friedman and Layard is that they are both questioning what the relationship is between growth and happiness. The dissimilarity is that they seem to reach almost opposing conclusions.
The second comment to be made about the thesis is that it's nice to have this historical perspective on this questioning of growth and the real purpose of it. It is useful to be shown that, Adam Smith was asking some of these questions as well, and that Smith himself, as Professor Friedman explains, said that this wasn't an original perception of his, that this actually went back to the ancient Greeks. So what might seem sometimes, in a culture of limited historical memory, to be a new thing, namely that we're worried about growth and what it does, is in fact as old as economics, and in fact older.
The third point is that at a time when growth is being attacked, when people question whether in fact we ought to be targeting growth, it's nice to have somebody making an argument in favor of it.
Now the commentator does not do his job unless he raises a question or registers a mild objection and so forth; so I will now attempt to do that. My objection has to do with the relationship between Professor Friedman's argument, on the one hand, and Layard `happiness' story on the other. The bottom line is that I would have wished to have read a more direct engagement with the Layard view, a sort explicit taking on of that view.
The way the book begins is that it sort of stipulates that there is this survey literature in which we don't see people becoming happier with growth in their incomes. So we will accept that and we will look not at the kind of consequences to the individual of extra growth. Instead, we'll make an argument about the social benefits of growth, about how societies become more tolerant, more open towards immigrants, and better at looking after those who are unfortunate in society. So we're making a social claim about the value of growth as opposed to a claim on behalf of the individual. That I think is the contention at the beginning of the book.
This raises a question about how social morality would be enhanced, unless it worked through the mechanism of changing the individual. I mean, society, after all, is a collection of individuals. This was beginning to be for me a niggling question, but it was then squarely addressed in chapter four where Professor Friedman says that actually there is an effect on individuals, that they do feel more open and are more likely to be tolerant if they are doing better than they were five years ago or ten years ago — they're less defensive. He also brings in the literature showing how people's averseness to losing something outweighs their enthusiasm about gaining something. So take a stagnant society where there is no growth and somebody who gains income must therefore, by the law of averages, be doing it at the expense of somebody who's losing it. The person who's about to lose, or fears that he or his children might lose, will resist change far more actively than the potential gainer will advocate change. This leads to a kind of cramped, un-open, defensive social morality.
And so at this point I thought: `Great, this is a direct argument as to why the Layard view of the impact of growth on the individual is too narrow'. But much of the rest of the book, I think it's fair to say, goes back to investigating the relationship between growth and social trends. It does so, as I said, in a dazzling way and one that is very much fun to read, but because of my particular hang-up, I wanted to have a more direct hit on the Layard hypothesis.
I would end by saying that to me the fundamental defense of why growth is good for the individual is that it extends the field of human experience. Maybe making individuals richer won't provide them happiness in the sense of elation, but they will have a broader range of individual experiences. This more ambitious attempt to create a relationship between social morality, openness and tolerance, on the one hand, and growth, on the other, is much harder to establish and in a sense, maybe less persuasive at the end of the day.
FATHER SMALL: Thank you, Sebastian. We turn now to Nigel Ashford from the George Mason University's Institute for Humane Studies. Just the name alone should get you racing to the Web site to see what all that's about. He has asked me, since my principal role is to publicize other people's fare, to tell you to visit www.aworldconnected.org. That certainly is even more intriguing than the Humane Institute to get us rushing along. But anyway, Professor Ashford, if you'd like to offer your comments.
Nigel Ashford's remarks
MR. ASHFORD: Thanks very much. I'm especially grateful to the IMF for inviting me because I am not and never have been an economist. I'm a political scientist, which leads me to look at a different set of questions.
Ashford and Johnson
I'd like to spend most of my time criticizing the book. But I'd want to begin by saying that everyone should read it, and by everyone, I mean everyone. It would be a great shame if the book was only read by economists. Indeed, as it has almost no math, is very well-written, and has major policy implications, it may be read by everyone except economists.
I'm going to be brief on its strengths and then concentrate on the criticism.
I wholeheartedly agree with the central thesis as outlined in the invitation to this book forum: Economic growth gives benefits far beyond the material. It brings greater opportunity, tolerance and diversity, social mobility, commitment to fairness, and dedication to democracy.
I strongly endorse the emphasis on the power of ideas. I particularly enjoyed chapter two on the Enlightenment. And this may seem strange, coming from the mouth of an Englishman, but I particularly appreciated the proper due given to French thinkers such as Montesquieu and Turgot. I only wish the French did the same.
Almost every chapter begins with a set of stimulating questions, noting the existence of alternative hypotheses. It then marshals the evidence, drawing upon a rich and impressively wide literature.
I am addicted to footnotes. My addiction was satisfied by this book.
Praise has been fulsome and richly deserved in the reviews. But to make best use of my time, it probably makes more sense to identify and concentrate on my criticisms, and they revolve around three issues: first, insufficient discussion of the characteristics of a moral society; second, the conflict between the explanatory model and the normative model; third, an exaggerated view of the ability of public policy to achieve the desired goals.
Let me begin with the first question: the characteristics of a moral society. In the preface, Professor Friedman identifies the characteristics such as tolerance that we've talked about, and then goes on to say: `I make no attempt here to argue why these characteristics of the society are desirable and moral. I take them to be so for the reasons that political thinkers over the centuries, both theoretical and practical, have recognized.' But what those reasons are is never revealed in the book.
Now, the Enlightenment had an answer. It was that the purpose of life is happiness and happiness is achieved by allowing individuals the freedom to pursue happiness as they understand it. And I think there's a broad consensus in the history of ideas about what is the nature of happiness, say satisfaction with life as a whole, but there's heterogeneity in belief about how one achieves that happiness.
Professor Friedman discusses these `happiness' studies, which are largely based on self-declared happiness in surveys. I urge cautious use of these surveys. I think there's a difference between the real qualitative and subjective state of happiness, on the one hand, and, on the other, the way in which people report what they feel. We don't know how talk relates to fact. Indeed, I suspect growth is a byproduct of the pursuit of happiness, not necessarily happiness itself, in which case the goal of public policy should be to provide a framework for individuals to pursue their own happiness as in the Declaration of Independence, rather than pursue growth directly. And if you're interested in this happiness debate, I recommend a Web site by a friend of mine called Happinesspolicy.com.
Moreover, Professor Friedman never explains why these particular characteristics were chosen. One of the greatest characteristics of a moral society is peace, which should have been included. There's a very short reference to how commerce reduces wars, followed by a very strange and unconvincing counterexample of the Persian Gulf War, which in my view is an example of coercion, not of commerce, a result of pre-Smithian thinking by Saddam Hussein that the control of resources was the source of wealth. Professor Friedman provides a very extensive and interesting discussion on the `democracy leads to peace' thesis but almost none on the far more significant `commerce leads to peace' thesis. I should say I'm a skeptic on the former as I suspect the causation may be the opposite: It is peace that leads to democracy.
The next point I want to raise under this heading is Professor Friedman's use of the term `fairness', which he seems to think implies support for government welfare, affirmative action and labor laws. So he talks, for example, how most people want equality of opportunity and fairness but they only oppose them because of the costs to themselves, and he attributes the decline of public support for things like affirmative action and welfare to economic stagnation. But there may be legitimate criticisms of these policies, both moral and consequentialist, and I think there's a danger that opponents are dismissed for being mean-spirited rather than examining the real basis of their argument.
So that's my first theme. We need more discussion of these moral characteristics.
My second theme is the conflict between the explanatory model and the normative model. The explanatory model is that growth has enormous morally beneficial consequences. However, the author's normative model frequently recommends policies which undermine growth.
Let me tell you the example in this chapter on the New Deal, in which `The Great Depression' is called `The Great Exception', as the author argues that the 1930's was the exception to the rule that stagnation reduces toleration and other moral values. Professor Friedman says that it was the New Deal that increased opportunities and improved working conditions, and reduced scapegoating.
But there's an extensive literature suggesting that the New Deal both extended and deepened the Depression. That FDR tripled taxes; weakened surviving banks; supported compulsory unionism (which led to discrimination against blacks because most unions were white only); increased the cost of employment through labor laws, minimum wages, and the payroll tax; undermined competition and increased prices. Leave alone the fact that it was FDR who created the Social Security problem which Professor Friedman quite rightly emphasizes in his final chapter. The Depression was ended by World War II, not by the New Deal, and FDR certainly demagogued as scapegoats bankers and businessmen from his first inaugural onwards.
So the Great Depression, in my view, supports his general thesis that stagnation leads to bad policies; it is not an exception. But because he likes the New Deal policies, he's unable to admit it.
A more contemporary example is the Kyoto treaty. Regardless of one's view about the reality or causes of global warming, it is widely recognized that the full implementation of the Kyoto protocol would extensively damage economic growth. One should acknowledge tradeoffs.
The chapters on development are a debate about the relationship between growth and democracy. It is an extremely important and interesting debate, but it does not address, directly, the types of policies that promote growth that could be adopted by both democracies and dictatorship.
We are both influenced by Douglass North and the new institutionalism, and Professor Friedman says what seems to `matter most' are the rule of law, law and order, respect for property rights, and less corruption. This is what he says `matters most'. And yet he never pursues that line of argument. He barely mentions respect for property rights and does not acknowledge that one of the easiest ways to achieve less government corruption is to reduce that which the government controls. So I think the book is disappointing on the topic which would be of most direct interest to this audience.
My third theme is exaggerated role of public policy in promoting growth. The book claims that the market underproduces growth because it cannot put a price on the moral benefits. Professor Friedman mentioned that in his presentation, and he says on page 15, for example, "the right rate of growth is greater than the purely market-determined rate, and the goal of government policy is to foster it."
He makes the classic error, that because markets fail, government should step in. But there is both market and government failure. One should compare real markets and real governments, and not real markets and ideal government. He claims that markets have negative externalities that require intervention. He ignores both the positive unintended consequences of markets and the negative unintended consequences of governments. Another problem with this argument is the `knowledge problem'. He wants the right rate of growth. How does one know what is the right rate, and why should we accept his view over that of economists who have a very different view?
Let me conclude by saying that I fear that by spending my time on disagreement, I may have given a false impression of my view of the book. I think it is wonderful! Like all great books, it asks the right questions, and most of the time I liked the answers. Thank you.
FATHER SMALL: We're talking about some of the basics of human existence, and happiness and peace, and all the things we care about - so it might eat into the time allotted for our little refreshments afterwards. But so that the sun may not set on British loquaciousness, Simon, if we could turn to you.
Simon Johnson's remarks
MR. JOHNSON: I knew that I'd have to be quick as I'm the last person on the panel. I didn't know I was following two British people who not only were quite humorous but also structured their remarks in exactly the way I was planning to structure it. I realize now that we're all a product of chapter nine, particularly page 243, and what's happened in Britain over the past 200 years.
So I'd like to offer three tolerant, fair and democratic points, and just like the other two discussants, first I'll agree, then I'll agree with a couple of caveats, and then I'll disagree very quickly.
First, the agreement. We should all think more about how economic growth matters for moral consequences. At least among economists, and economists spend a lot of time worrying about economic growth, this point is hardly ever made. To illustrate that, you know, how limited the focus is on economic growth, I think one should turn to one's favorite piece of literature or genre of novels. Let me just pick one, and think about how important economics is in there. How many great stories are there out there in which the pursuit of a few extra dollars is really the compelling part of the story and what draws you in and what gives a story lasting value?
Take, for example, The Iliad ...
Just to start at the beginning. Don't worry, I'll go a thousand years at a time, Mr. Chairman.
So take Homer's classic account of the Trojan War, which has clearly stood the test - it has had a shelf life. No doubt if we look hard enough we could find issues of macroeconomic stabilization, perhaps even something about the money supply. How did the Greeks pay for all those ships? Did they have flat taxes?
Who cares? Right? I mean, yes, there are issues of contract enforcement and unconstrained executive power. That's not what the story's about; that's not what you remember. That's not why it's lasted 3000 years, roughly. It's a moral. It's about, you know, moral values, moral conflicts, moral issues of the day, some of which resonate today more than others. Sulking in your tent, for example. My 2-year-old daughter works a lot on that.
The moral consequence of growth matter and we should talk about them all. I completely agree.
Second, the topic on which I largely agree. Professor Friedman is proposing, I think, that growth is, roughly speaking, a sufficient statistic for moral development or the modernization of societies in a way that we're — I think at least on this panel — comfortable with and I think that's broadly right. If you look over a 50 to a 100-year horizon, I think growth is the thing to focus on, and higher incomes are the part that have brought us all here, actually, into this room. So this is very important. The World Bank doesn't need to target tolerance directly, or democracy, but should focus on and worry about primarily economic growth. That's the message from the book and it's a very powerful message.
The caveat, though, is, if you read the book carefully, it has a lot of nuance and a lot of subtlety and a lot of fascinating footnotes (to which I'm also addicted). It turns out that the author is quite explicit that growth is not the only thing you should worry about, if your time horizon is, let's say, three or five years or even ten years, or perhaps even twenty years. There are many episodes where tolerance has gone the other way and there are many examples, which are quite nicely laid out, where the initial consequences of growth have been negative. For example, what happens to the environment when you have some growth? It may be that, initially, the environment gets worse, and then over time, as incomes accumulate and people's values change and perhaps people have a bit more money to worry about deforestation or air pollution, then the environment will improve. Well, that's great if your horizon is 50 years. If that's the case, then `don't worry ...', I guess I was going to say `be happy',
but it should be `Don't worry; just grow.'
But if you're worried, as I think many people in this room would be, about what's going to happen over the three to five year time span, then, unfortunately, growth is not enough. You do have to worry about when and how these shorter run adverse consequences kick in and what you can do about it. And Professor Friedman actually has a lot of examples on that and I think that the book is worth reading in great detail for that.
Now, my disagreement. If you'll turn to page 316, figure 12.2, and I can wait while you all go to get copies. No? All right. Anyway, this is a very interesting figure which shows that places or countries that have had more growth in income per capita from 1970 to 2003 have a higher level of civil rights and political liberties as measured by Freedom House today. So places that had more growth have a higher level of democracy, and democracy is a lot of what underpins, I think, the moral consequences that Professor Friedman has focused on.
Now that figure is clearly right. But here's what's worrying me. If you look over a 20 year or 30 year period, or even over the last 100 years, it's very hard to find a relationship between change in income level and change in democratization.
Now there's various explanations for this, which the chair will not allow me to go into at length, but what I would suggest is that in this period of modern economic growth since 1750 or 1800, there've been at least two growth paths. One which receives more attention here, the path that the United States, France, Britain and Germany found themselves on, is a path in which incomes rise and you get more democracy and you get the improvements in moral character we talked about.
But there's a set of countries, unfortunately a rather large set of countries, in which income has gone up to some extent but they've not, however, had much democracy. The relationship between income and democracy in that set of countries has been much weaker than the other set of countries.
Now I'm optimistic. I think you can escape the bad path, you can break away from it, you can have improvement in both income and in democracy. But I have to say, since 1960, by my reckoning only thirteen or so countries have escaped the bad path and found their way on to or close to the good path.
So perhaps, Professor Friedman, you need a sequel. I thought of topping the praise of the other discussants by saying: `I wholly loved the book; I love the next book too'. And to ensure that, I have a structure for the next book, actually, which I'll send to Professor Friedman. So the sequel, I'm confident, will deal at great length with these issues. Thank you very much.
Questions from the audience
FATHER SMALL: I think in the interest of tolerance and democracy and openness, I'll get some voices from the floor. Then we'll invite Professor Friedman to be the one who responds to those questions, as well as the rest of the panel, since we don't have a lot of time. So do have a few folks who want to offer sort of short, pithy, lapidary comments or have some questions? Sir?
QUESTIONER: Dear Professor Friedman, thank you so much for showing up along with your British colleagues. I'm from University of Maryland. What is your opinion about globalization as a part of economic growth?
FATHER SMALL: Thank you. Sir?
QUESTIONER: Professor Friedman, I've been a student of economic growth for about 20 years. I'm over here.
PROFESSOR FRIEDMAN: Oh, there you are. Thank you. There was this disembodied voice!
REVEREND SMALL: It's God.
QUESTIONER: For most of that period, I've thought that one of the best arguments for economic growth was the fact that it pushed along Enlightenment values, which is the point that you make and which I strongly agree. But my experience of the United States in the last six years or so has led me to question this. I'm wondering whether large parts of this country can be called a post-Enlightenment society. Do you have any ideas on that, why we seem to be going back in some ways in this country, which is the most advanced in the industrial world? Thank you.
FATHER SMALL: Thank you. Just a couple more comments. Yes?
QUESTIONER: It seems to me that from what has been said so far you haven't made a clear linkage between the engine of economic growth and moral consequences. For example, if the engine of growth is education, which I believe was largely the case in Korea, I suspect that that is much more associated with moral values than cases where it's the same kind of economy but one in which the haves continue to have and the have-nots continue to have not. Thank you.
FATHER SMALL: Thank you. Sir, in the back?
QUESTIONER: I was very pleased to hear Professor Nigel Ashford's short criticism; it was refreshing. My question is how do you think about the benefits of income growth in countries where there is a clear majority of underprivileged and a minority that holds the means of production?
FATHER SMALL: Thank you. Maybe one last one over here.
QUESTIONER: Thank you. I was hoping to hear something about developing countries that are really selling their natural resources, which is counted erroneously by economists as growth. This is a fundamental question which has been ignored, I think.
FATHER SMALL: Thank you. Over to you, Professor Friedman, for a short history of everything in response to those questions and one of my own. I was intrigued that there was no major discussion of good old catholic principles like the common good and self-sacrifice, of self-giving being constitutive of the human experience, of the notion of a public consensus in a country. For example, in South Korea, the sacrifices that it made many would say contributed towards its success.
Response from Ben Friedman
PROFESSOR FRIEDMAN: Well, let me say thank you to all four of my discussants, who I think have made very interesting, valuable and important remarks. And thank you also to the people sitting in the audience who have also asked incisive questions.
First, on Sebastian's remarks about Professor Layard's view on the effects of hard work: I have no reservation that people working hard is a good thing. The notion that there's something wrong with a system that leads people to work hard doesn't resonate with my sense of values. Now I understand that this may be an aspect of European versus American views, but after all, one is a product of one's own society. Now, of course, if the only reason people are working hard is in order to engage in some sort of competition that is doomed to fail, then that's not good. But hard work, in and of itself, I think is a good thing.
To turn to Nigel's comments: Nigel mentioned that he is not an economist. Despite the fact that the median income has not been rising in the United States I think we should all be tolerant and, Nigel, you can be forgiven for this failing on your part.
Nigel argued that what he was looking for more was the notion that freedom brings happiness, ultimately, and that the Enlightenment thinkers to whom I appeal emphasized that that's why tolerance is a good thing, that's why democracy is a good thing. I endorse all of that but saying all that simply wasn't my objective. I didn't feel that I, as an economist now, had anything to contribute to that conversation and so I simply took it that tolerance and these other aspects of life are good. They're good for the reason that Locke and Montesquieu told me, and I believed them when they told me, and I don't have anything to add to what they said on that.
Now another issue that Nigel raised, which many people reacting to this book have also raised: what about the relationship between economic growth and a country's stance in international relations? Does growth lead to engagement? Does it lead to isolationism? Does it lead to aggressive promotion of one's interests?
To say a little more starkly what Nigel was getting at, because it's right, the focus in the book was almost exclusively on countries internal moral character. It's not that I don't think there might not be some relationship between economic growth and a country's international posture. But I shied away from it for two reasons. One, in case you drop the book on your foot, you will notice that it's already at about the outer limit of what the nice folks at Random House were going to let me do. But the real answer is my own ignorance. I just didn't think I knew enough about it to be able to write that book. Several people have suggested, and it's an interesting idea, that what I might do is co-author a sequel with one of my colleagues. On the right, I could pick Sam Huntington. On the left I could pick, say, Stanley Hoffman. In the middle, I could pick Joe Nye. I have many colleagues, fortunately, who do know a lot about that, and that would be an interesting project, but I would not be capable of authoring that by myself.
Now another aspect of what Nigel said that I do agree with is that he pointed out that fairness is not only about public policy. That's absolutely true. I happen to teach at a private university and I teach at a private university which, for many years, has made no use of financial ability to pay in our admissions criteria. We have an absolute policy. The admissions decision is made without knowing who needs scholarships, and we admit the class, and then we say, okay, who needs money. This is part of fairness, you know, and this is done, and we are a part of the private sector. So far be it for me to say that fairness is only about public policy, and I hope people don't take that away from the book. But I would argue, very strongly, that fairness is also about public policy and while one can imagine living in a world in which opportunity is made fairer only by private initiative, I think there are many elements of fairness that are about public policy and I endorse those in the book.
Now I'm going to say something next as a response by combining a comment that Nigel made with one that Simon made. The burden that I take up in this book, as the title suggests, is to talk about the consequences of economic growth. It is not meant to be a book about the causes of economic growth. Many, many economists here at the Fund, and elsewhere, usefully research the latter subject and I refer in part to that literature. I have one chapter on the developing world in which I ask whether there is the possibility of virtuous or vicious circles because maybe while it is true that while growth promotes an open society, maybe an open society in turn promotes economic growth. But in terms of Nigel's comments on the Great Depression and also Simon's comments on aspects of the growth-democracy relationship, let me be very clear that the burden of my work here is on the consequences of economic growth.
I don't want to get into whether the New Deal mechanism, policies, were productive or counterproductive. That's a different set of arguments. But my colleague, Daniel Bell, has an interesting hypothesis that he advances in a book aptly called The Cultural Contradictions Of Capitalism, and I think this a bit what Nigel was after in his remarks on the New Deal. Dan's idea is that there is a contradiction in that rising incomes make a society prepared to move in directions that choke off the origin, the mechanism, behind rising incomes. This is what he meant by the cultural contradictions of capitalism, and this may well be true, and I entertain this possibility. When I get to the policy section of the book, however, I argue, very strongly, that there are policy mechanisms that we have at our disposal that would enhance our economic growth capabilities and simultaneously would enhance the fairness and democracy and tolerance of our society. So it need not be the case that anything we do to advance these other objectives would undermine growth.
Now finally, referring to Simon, I have to say that only an Englishman would fail to see that The Iliad was about a woman.
When Simon was going on about the causes of what the Iliad was really about, I kept waiting for him to get to what it was really about, and sure enough, the Brits missed it again. So only an Englishman would make that omission.
Now Simon raised the question, which is a quite serious one though, whether there should be a relationship between changes in income and changes in the level of democratization. (Now this also gets us back to some of the issue that Sebastian raised, and I'm sorry I don't have time to go into the economic mechanism in greater detail.) There are two responses to the question in the form that Simon raised it. One is that the story in the book, the economic model, if you would, is not about being rich, it's about growth, and it's not an argument that having a higher income level makes us happier. It's about what difference the notion of forward progress in people's lives make.
The second answer to Simon's question though, which makes it even more complicated, is that many of the moral aspects of society that I have in mind in the book operate as a form of ratchet effect, you see. So that when I talked about attitudes toward immigrants, clearly, those come and those go, but I cannot imagine what is going to happen in the United States that would make us take away blacks' right to vote. That isn't going to happen. So in terms of these Freedom House measures, many of them work with a ratchet: you either have your progress or you don't but you don't fall back and that makes establishing what the relationship is more difficult.
Now very briefly to address some of the quite insightful, I thought, questions from the floor. One gentleman asked what is my view toward globalization. Here I would appeal mostly to the work of others, and I would point, for example, to my colleague, Jeff Williamson. The way Jeff puts it is that the main lesson of globalization is that the big losers are the countries that don't participate. It's either the North Koreas or the Myanmars that choose not to participate, or it's other countries that are precluded from participating, perhaps because the only markets in which they could be competitive are kinds of agricultural markets from which they're barred by rich country agricultural subsidies and restrictions. So my view is that in terms of who gets ahead, who doesn't, even in terms of narrowing of income, inequalities across countries, the big story is that the bad news is not participating in globalization. That's the first magnitude result.
Second, the gentleman here asked why are we retreating, in many respects, in the United States within the last six years. I would appeal, again, to what I said before. We have had economic stagnation in the United States for the last six years. The median income, six years in a row, certainly five years in a row and probably also for 2005, is falling back, year after year, compared to inflation. Therefore, I think what we are seeing, in many respects, is not just a kind of pathology—you didn't use the word but it was implicit in what you said-but the predictable pathology that comes into play any time the bulk of a society's citizens are losing their sense of forward progress, as I think today many people have in this country.
The question over here was are there different engines of economic growth? Yes. And does that matter for what moral consequences follow? Again, yes. Both in answering your question and also in answering the other gentleman's question about the relationship between growth and distribution, let me emphasize that the driving force in the hypothesis I'm suggesting is not aggregate GDP growth. Aggregate GDP growth is necessary because if the total production isn't increasing, then it's hard to know how you're going to have the majority of the population having an increasing living standard. So it's necessary but it's not sufficient. My story is not about what's happening in the top ten percent of the income distribution. It's not about what's happening in the bottom 10 percent either. This is a story about what's happening from, say, the 10 to 90 percentiles. If the 10 to 90 crowd is not moving ahead, then my conclusion is these pathologies will emerge, even if the top 10 percent is doing very nicely.
The experience over the last six years in the United States is as concrete an example as one can find. In the United States today we're enjoying quite nice GDP growth. Real growth over these past six years has averaged 3 percent at the aggregate level. Well, that's terrific. Who could complain about that? But the point is, as I think we all know, the fruits of that growth are sufficiently misdistributed, that they have accrued entirely to the top 10 percent of the population.
Similarly, there are some policies toward economic growth in the developing world — and I took your question to be referring to the developing world — that are conducive to sharing the benefits of growth and there are some policies that are inimical to that.
The final question I'll address is Father Small's. I was disappointed to see that he didn't think the book was, in part, about things like social understanding and public consensus, because in a large part, I think that is what it is about. The conclusions that I draw are not just narrowly about legislation, although it's in part that. It's not just narrowly about who's admitted to which country club. It's not narrowly about who gets to vote. It's about the spirit in society that allows a society either to move forward or causes it to fall back. To take one concrete example to address Father Small's question: I draw a strong contrast in the book between the spirit, the legislation, the character of the literature, and the social consequences of the so-called `populist' period of the 1880s and 1890s, versus the soc-called `progressive' period of the early decades after World War II. It turns out that many of the positive developments in the progressive period were also advocated by the populists. But they couldn't get anything done. They couldn't get those forward-looking tolerant policies passed, when they did advocate them. Why?
Because after 20 years of economic stagnation — remember the word Great Depression in the United States originally didn't mean the 1930s but the 1880s and 1890s — people at that time were focused on finding scapegoats and on panaceas like gold this, and free currency that, and free banking something else. Hence, the public consensus, to use your phrase which I like, was missing. And it wasn't until after the turn of the century, after the renewal of economic growth when people understood they were going forward, that the public consensus was there, and the social understanding was in place to allow the progressive forces of the 1905 to 1915 period to put in place many of the same ideas that the populist forces of 1880 to 1895 had also endorsed but which were `dead in the water'.
So when people read the historical sections of the book, which I hope you will, please understand that it's not just about the legislation and the religious restrictions and the anti-immigrant sentiment. It's about, to use Father Small's phrases again because I like them, the public consensus and the social understanding that enables a society to move forward in these moral dimensions rather than not. Thank you.
Closing remarks by Father Small
FATHER SMALL: Thank you. This is an important conversation. I think it's a great testament that the auditorium was full today, that in this town, particularly around lunchtime, so many people stayed for so long. We could just take the rest of the day off and discuss this all afternoon. I wish we could. Instead, buy the book, or read the book at least, but it's better if you buy the book, and it will be on sale outside. There's a little reception afterwards.
Thanks to the IMF, thanks to Professor Friedman for launching what is a deceptively simple thesis, but as a result of which we're all engaged and enter this conversation more deeply. I think we realize a lot of our own understandings — I don't know what the plural of Weltanschauung is but I hope a German speaker will tell me afterwards — are modified by this integration not just of markets and economies but of our understanding of the human person in society.
Thanks also to the panelists who offered their insights. It would be great if they too could stay around over a glass of Perrier for the book signing. I was thinking, Simon, that the sequel to Professor Friedman's book has to have a title like Confessions Of An Economic Lothario or something like that, something very glamorous to whip those Brits into an understanding of The Iliad. Thank you very much.
IMF EXTERNAL RELATIONS DEPARTMENT