The Virtue of Riches

How wealth makes us more moral.

Megan McArdle from the July 2006 issue

(Page 2 of 3)

The current global economic climate —economic stagnation in much of Europe and an economic recovery in America that has bypassed much of the middle class—gives us one way to test Friedman’s hypothesis. If he’s right, global trade should be much more threatened now than it was in the 1990s. Sure enough, the Bush administration has struggled to pass even a minor trade pact with Central America, while the European Union seems perfectly willing to scuttle the Doha round of World Trade Organization negotiations rather than expose its farmers to competition. That doesn’t prove Friedman is correct, of course, but it’s certainly suggestive.

Disturbingly, if Friedman is right, unless median incomes start rising soon, it won’t be long before Americans start taking a long, skeptical look at our neighbors. (Given the current uproar over immigration, it’s possible that we’ve already reached that point.) Nativist and racist movements are at least partly about the economic insecurity of their members; as August Bebel said, “anti-Semitism is the socialism of fools.”

Friedman musters an array of empirical evidence to connect the rise of the Ku Klux Klan in the 1920s to the growing economic anxieties of its members, who were frequently “farmers, skilled craftsmen, small business proprietors, blue collar workers…and low-end white collar workers of all kinds.” Those Klansmen faced new competition from Catholics and blacks at a time when economic advancement was already becoming more difficult thanks to structural changes in the economy: troubles in the farm sector, population shifts from the country to the city, increasing industrial consolidation, and structural shifts away from certain industries and regions. Friedman quotes historian Nancy McLean’s observation that those economic changes “cut short the climb of men on the make and defied their dreams of being their own bosses.…Class standing and economic insecurity created a potential among white men for openness to the Klan’s message.” If we can all agree that forestalling movements like the KKK is a worthy social goal, it suddenly becomes terribly important to make people feel wealthier.

This is not as simple as it sounds. People judge how well they are doing in two ways: against how well they think other people are doing and against their own (and their family’s) recent earnings. That’s why an American postal worker might not be particularly happy with his income, even though in terms of transportation, health care, and personal comfort he has a better standard of living than Cornelius Vanderbilt and other past plutocrats. Ironically, globalization therefore has made ordinary citizens in many countries unhappier with their lot, even as it has made them objectively better off. The more information people have about higher living standards elsewhere, the less content they are with their own lifestyles.

U nless we try to bring back communism, something vanishingly few crusaders against inequality would support, any social income distribution will always leave some on the top and some on the bottom. But nations can and do increase the size of the economic pie, allowing everyone to get a bigger piece even if their proportions stay the same, or even shrink. Friedman argues that governments everywhere should focus policy on creating the broad prosperity that will allow their societies to become more open, tolerant, and generous.

Friedman’s argument for what wealthy nations ought to be doing is the weakest part of the book. Translating analysis into policy is where many otherwise brilliant works on popular economics fall down: Economists know lots of ways an economy can go wrong, but they’re not completely clear on what makes one go right. The World Bank spends pretty much all its time analyzing developing economies, and yet in a recent Foreign Policy essay, Moisés Naím quotes François Bourguignon, the bank’s chief economist, as saying “We do not really know what causes economic growth…[w]e do have a good sense of what are the main obstacles to growth and what are the conditions without which an economy can’t grow. But we are far less sure about what are the other ingredients needed to create and sustain growth.” Even in those happy moments when economists have a pretty good idea of what should be done, they are generally at a loss to prescribe programs that can survive a political process that is usually controlled by the same group of people who are causing the problems.

So Friedman trots out some tired old standbys: Increase investment! Boost education! He might as well declare that we should all try harder to love one another. Investment and education are fine things; sometimes they even boost economic output. But those cases are limited, and government policy has proven incredibly inept at targeting those specific areas.

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