Thursday, December 22, 2005

Why The Rich Must Get Richer

A society experiencing economic growth is likely to be happier and more successful than another that is not, even if the no-growth society has achieved a higher (but stagnant) standard of living. In Smith's words, it is “in the progressive state, while the society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the great body of the people seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state.”

Growing prosperity, history suggests, makes people more tolerant, more willing to settle disputes peacefully, more inclined to favour democracy. Stagnation and economic decline are associated with intolerance, ethnic strife and dictatorship.

The key thing is the way these two standards of comparison—the potentially harmonious and the socially self-defeating—interact. If people are becoming better off relative to their own past standard of living, they will care less about where they stand in relation to others. If they are not growing better off relative to their own past standard of living, they will care more about their placing in relation to others—and the result is frustration, intolerance and social friction. Growth, in short, has moral as well as material benefits.
Interesting thoughts from Benjamin Friedman's new book The Moral Consequences of Economic Growth. I agree with most of what he has to say. I would probably define growth a little bit different. I bet he is looking at GDP growth. I think there are issues with using GDP for this (which hopefully I will get around to writing) but the idea that low unemployment and a rising standard of living lead to other good things, I can go along with.

I also find the idea that "people compare against themselves when they are improving their standard of living but against others when they stagnate or fall" fascinating. And it rings true to me. Never been a big fan of the old "a rising tide lifts all boats", since being 6 feet higher doesn't change the fact I am still sitting in a dingy and you are on a yacht. But, maybe I need to rethink that in light of this.

Via The Economist

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