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Tuesday, May 18, 2010

The Moral Consequences of Economic Growth

A Harvard Professor Ignores Fundamental Economics

Benjamin Friedman is a professor of political economy and a former chairman of the economics department at Harvard University. He is also an unswerving advocate of the interventionist welfare state. His recent book, The Moral Consequences of Economic Growth, is meant to demonstrate what is necessary to assure that the majority of the people will continue to support economic regulation and coerced redistribution.

Friedman’s starting point is the idea that when people experience rising incomes and economic improvement, they tend to be both more generous and more benevolent toward their fellow men. On the other hand, when they view their present and future economic prospects as either stagnant or regressive, they tend to be stingier and less sensitive to others.

Friedman then translates this into a policy prescription for government to foster increasing economic growth, without which, he contends, many in society will be less open to “tolerance,” “fairness,” and “democracy.” To demonstrate this, he takes the reader through a lengthy, and often disjointed and meandering, account of American and European history during the last 300 years.

Long periods of sustained economic growth, Friedman argues, provide people with a psychology of economic security and confidence that makes them less fearful that continuing social change may undermine their material status. In other words, high economic growth makes people view change as a “positive-sum” game in which everyone can be better off at the same time. Low or no economic growth makes people feel that change is a “zero-sum” game in which others must be getting ahead at their or somebody else’s expense. Low growth, therefore, creates a culture and politics of mean-spiritedness.

He tries to show that it has been during periods of sustained economic growth that people have been less racist and sexist, more willing to pay taxes for the social “safety-nets” of the welfare state, and supportive of “activist” government steering society toward desirable “social ends.” During periods of prolonged slow growth, people become “anti-government,” wanting to hold on to what they have and not “share” with those who are less well off.

To prove this Friedman must perform a variety of interesting intellectual contortions. For instance, the expansion of government during FDR’s New Deal in the “bad times” of the 1930s becomes, supposedly, the “exception” that proves the rule. He also contends that people turned against Keynesian economics in the 1970s because they felt worse off during the decade’s inflation. The unstated presumption, therefore, is that Milton Friedman must not have received sufficient raises from the University of Chicago in the 1960s and 1970s. Why else would he have been so “negative” about society that he devised the monetarist case against discretionary macroeconomic policy?

And we have an internationally known Harvard economist bemoan the fact that during the “uncaring” and clearly “cruel” years of the Reagan administration, the national minimum wage was not increased. One can only conclude that the laws of supply and demand, and the harm from pricing people out of the market by mandating a wage above where the market would have set it, are fundamental truths that have been forgotten by at least some of the members of the Harvard economics department.

Benjamin Friedman rationalizes government intervention to foster continuing economic growth by arguing that such growth is a “public good” that would be “undersupplied” if left to private decision-making. Since growth generates the morally desirable side effects of “tolerance,”“fairness,” and “democracy,” for which there are no market prices, private individuals may choose to save, invest, and educate at levels below some rate of “optimal” economic growth. (The mantra of “tolerance,” “fairness” and “democracy,” which is repeated throughout the book, is merely Friedman’s Orwellian “newspeak” for all the welfare-state policies he likes.)

Friedman admits that government deficits are “bad” because they divert some of society’s resources away from future-oriented private-sector investment. But rather than cut spending so the government would borrow less, he wants those recent tax cuts for “the rich” reversed to pay for increased federal largess. The supply-side economists’ arguments over the last 30 years that raising marginal tax rates reduces the incentives for work, saving, and investment seem not to have penetrated the walls of Friedman’s office at Harvard.

And what exactly does he want government to do? He wants it to foster more college education through student loans and tuition subsidies; and private employers should be induced through tax-breaks to offer more on-the-job training. He does concede that the quality of public education is less than desirable and could be improved through competition. But he wants any “school choice” to be limited to government-run schools. Better-educated and -trained young people, you see, will generate the economic growth in coming years that will provide the wealth to support the continuation of Social Security and government health care.

Through all the hundreds of pages in Friedman’s book, there is one word that rarely appears: liberty. The only freedom that matters to him is that old New Deal notion of “freedom from want.”

That individuals should be free to retain the income they have honestly earned in the marketplace and to make their own choices concerning work, saving, and investment never even enters the discussion as a serious option. That individuals should have the freedom to decide for themselves the degree of benevolence and charity they wish to undertake is treated as something supplemental to government’s responsibility. Nor does Friedman even conceive of the possibility that education can and should be left to the market.

Friedman’s mindset is typical of the social engineer who views the members of society as puppets to be manipulated through government “pro-growth” policies in order to generate the wealth needed to fund the welfare state and to induce the right psychology so they will be willing and happy to be taxed to pay for it.

At a deeper level, therefore, Friedman operates on the basis of an almost crude “materialist” philosophy of history. How individuals think about freedom, society, and the nature and role of government is assumed to depend almost completely on their perception of whether their standard of living is rising, falling, or stagnant. Change the rate of economic growth, and you modify people’s beliefs and attitudes about the size and function of government. Get the economy moving along a faster growth path, and “the people” will want and support big government, like some version of Pavlov’s dog under the right stimulus.

Maybe if we could get Harvard University to cut back on Benjamin Friedman’s pay raises he would become disgruntled enough to write a new book, this time in defense of less government and more individual liberty!

  • Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.