The Ethical Economist

GROWTH MAY BE EVERYTHING, BUT IT'S NOT THE ONLY THING

Economists have long been a natural constituency in favor of growth. Since even the richest country has limited resources, the central economic problem is choice: Shall we fund tax cuts for the rich or investment in infrastructure and research and development, war in Iraq or assistance for the poor in developing countries and our own? By providing more total resources, growth should, in theory, make these choices less painful.

The United States, however, has powerfully demonstrated that while growth increases supply, it also raises aspirations. Choices that rich countries have to make thus seem to be no easier than those confronting poor countries, even though the tradeoffs are more heart-wrenching in the case of the poor. Brazil, for example, must choose whether to use its limited health budget to pay full-market price for AIDS drugs; some AIDS victims may live as a result, but people in need of other health care will die, because money that could have been spent on their needs is simply not there. More growth-provided resources, in this instance, mean the difference between life and death.

Still, growth has had its critics. There is a well-developed populist antigrowth literature concerned with, among other things, the impact of growth on the environment and on poverty. In this major work, The Moral Consequences of Economic Growth, Benjamin Friedman takes on such critics, positing that growth has not only obvious economic benefits, but moral benefits as well. He argues that it has the potential to improve the environment, reduce poverty, promote democracy, and make for a more open and tolerant society. But this is not to say that Friedman, a professor of economics at Harvard University, is simply a naive cheerleader for the market economy. His message is nuanced (though not, in some respects, as nuanced as I would have liked), and he realizes that growth has not always brought the promised benefits. The market economy does not automatically guarantee growth, social justice, or even economic efficiency; achieving those ends requires that government play an important role.

LET IT GROW

Historically, economists have questioned whether, at least in the early stages of development, growth is accompanied by societal goods such as greater equality and a better environment. Nobel Prize-winning economist Simon Kuznets argued, based on experiences largely before World War II, that there is an increase in inequality in the early stages of development. Arthur Lewis, another Nobel economist, went further: greater inequality, he argued, is necessary to generate the savings that growth requires. A later generation of economists has posited the existence of an environmental Kuznets curve: the early stages of growth cause environmental degradation, not environmental health.

Kuznets and his descendants held out the prospect that eventually growth would bring more social justice (greater equality, less poverty) and a better environment. But there is nothing inevitable about this -- which means that even if it has been true in the past, it may not be in the future. Inequality did seem to fall in the United States after the Great Depression, but in the last 30 years it has increased enormously. Many forms of pollution have gone down as richer countries have turned their mind to air-quality issues, but greenhouse gas emissions -- with all the dangers they present for global warming -- have continued to increase with economic growth, especially in the United States.

Friedman emphasizes in particular the importance of externalities -- instances in which an economic actor's actions have consequences for others for which that actor does not pay (negative externalities) or for which he is not compensated (positive externalities). Almost everyone recognizes these "market failures" (when markets on their own do not produce efficient outcomes) and their implications, most notably damage to the environment. The United States' production of greenhouse gases imposes staggering costs on others -- especially low-lying islands that will be inundated in the not-too-distant future -- but American firms and consumers do not pay for these costs. Correcting such a market failure does not require subsidies to oil companies to increase oil production (there is no market failure in that direction); it requires more conservation. But externalities imply a more general argument as well: if growth has broad-based societal benefits that go beyond those captured by each individual or firm, then there is a role for government in promoting growth.

Although one of these broader societal benefits is a more open and tolerant society, Friedman explains carefully that the relationship between democracy and growth is two-way: growth affects democracy; democracy affects growth. Both aspects of the relationship are complex and often ambiguous. China -- not particularly democratic or open politically -- has had the most rapid and sustained growth of any country over the past quarter century. Conventional wisdom holds that democracies, since they are more accountable to the "masses," pay more attention to the poor. But China has done more to reduce poverty than most other countries. In recent periods, the United States has seen median real household income fall, and the rich have received huge tax cuts even as poverty has grown.