China and Economic Growth

A somewhat different take on Ben Friedman's Moral Consequences of Economic Growth than the review I wrote for Harvard Magazine. Written for Caijing http://caijing.hexun.com/english/home.aspx in China:

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Up until 8000 or so years ago, it was crystal-clear why humans should pursue greater wealth--understood as better spearheads, more knowledge of the local environment, and occupation and control of regions where game was abundant and nourishing plants plentiful. Back when our ancestors were hunter gatherers life was short--high infant mortality plus all the attendant risks of the hunting-and-gathering ecological niche--and quite brutish: low technological levels and being always on the move meant that levels of comfort were low, and the absence of literacy meant that the cultural depth and historical memory of the band could not grow very deep. Life before agriculture was not especially nasty: our hunter-gatherer ancestors were healthy, well-nourished, alert, and engaged. But greater wealth for the band and the individual had very clear benefits: fewer of your babies died, you had a greater chance of living through the next winter, and you had a greater share of what comfort was attainable.

For all of the past 8000 years since the invention of agriculture, the benefits of pursuing have been much, much greater than back in the hunter-gatherer days. For the vast majority of the human race, agriculture has been a poisoned cup. Malthusian population pressures have--until the last century or so--kept our numbers high enough relative to our technological expertise that the overwhelmingly large majority of humans have been close to the edge of starvation and well over the edge of malnutrition. If the typical adult male hunter-gatherer human grew to be 5'8", the typical adult male peasant-farmer human over the past several millennia has only grown to be 5'2"--or less. Here too the benefits of increasing wealth for the individual and the group are obvious: richer people have more food and a better diet; their children aren't as protein-deprived and so grow taller, stronger, and smarter; their ability to engage in conspicuous consumption via something as simple as having meat on the table gives them status and social power; plus they have access to the amazing depth of riches of human culture. The rich have enough food that they aren't hungry (and good-enough quality food that their brains and bodies can grow, and their immune systems remain strong), enough clothing that they aren't cold even in the winter, enough shelter that they are not wet, and enough literacy and access to culture that they are not bored.

We are still in the agricultural age, or, rather, many of us are still in the agricultural age, or--perhaps and we hope--we are about to exit from the agricultural age. Perhaps one billion humans today have lives that are effectively equivalent to those of our pre-industrial ancestors. Perhaps two billion have lives better than those of our pre-industrial ancestors, but not better enough: they are still, sometimes, hungry and malnourished; they are still, sometimes, cold; they are still, sometimes, wet; and they are often bored. But there are three billion of us whose children have life expectancies greater than seventy or more years, who are well-fed, who are warm, who are dry, and who if we are bored it is largely our own fault. We three billion vary enormously in wealth, from Bill Gates down to farmers growing watermelons under plastic sheets outside of Shanghai. We are all able to do the important things: live a healthy life, fall in love, make plans for the future, watch our children grow, and play status games with each other--status games in which everyone (except Bill Gates) is both a winner and a loser, for as one journalist who covers Silicon Valley's "post-economic" says, they quickly find that the problem with owning a Gulfstream 4 as your personal jet is that you start meeting people who own a Gulfstream 5.

Why then are we still focusing so much on economic growth--on making more and more things, and becoming richer and richer--when at least the most prosperous three billion of us have what we need? More than two centuries ago Adam Smith--in his first book, The Theory of Moral Sentiments--mused on the puzzle of the prosperous merchant who drives himself mercilessly and ruins his eyesight pouring over his accounts all so that he can sit in the sun at leisure in his old age. John Maynard Keynes thought that at least the most prosperous of countries were on the verge of a cultural transformation: he thought that his peers' great-grandchildren would pursue not wealth and accumulation but rather human excellence and the cultivation of mental and aesthetic faculties. Yet the pursuit of wealth continues.

One reason that we still pursue wealth is that we are, collectively, not yet wealthy enough. Half the human race is still desperately poor. But give it another century, and the whole world may well be rich enough to strike any of our agricultural-age ancestors as being a total material utopia. Will we still accumulate and strive to be richer then? The answer is that we will because we will be playing the relative-status games of conspicuous consumption: I am richer than you. But should we?

My old Harvard professor Benjamin Friedman has just written a book, The Moral Consequences of Economic Growth (New York: Knopf), which implies that we should still strive for economic growth and increasing wealth. He argues that the wiring of our brains is such that the process of becoming richer relative to the reference point provided by our parents and their peers has a large number of beneficial moral as well as material effects. First, there is the effect of wealth on whatever upper class a society happens to develop. It was John Maynard Keynes who wrote that it is a much better idea for somebody to tyrannize over his bank balance than over his neighbors. Adam Smith wrote in the Wealth of Nations about how the growing wealth of London made it attractive for the British aristocracy to abandon their feudal armies and private wars and move to London to take up positions in society and at court. A society that is growing richer will have an upper class that focuses on gaining stutus by demonstrating its wealth as power-over-nature, rather than demonstrating its power as power-over-people). Adam Smith wrote about how wealth. The senior cadres in the days of Mao Zedong's dotage struggled not to display their wealth and cultivation to each other but rather to display their power to move people around as if they were counters on some giant game board, to China's immense cost.

Friedman makes a powerful argument that—-politically and sociologically-—modern societies are like bicycles. As we all know, the laws of physics (specifically the conservation of angular momentum) make a bicycle extremely stable as long as its wheels are spinning fast and it is moving forward rapidly, but extremely unstable as it slows to a halt. Friedman argues that whenever the wheels of economic growth stop—-in the sense not even of a depression but just of stagnation--political democracy, individual liberty, and social tolerance are greatly at risk even in countries where they are well established, and even in countries where by any standard the absolute level of material prosperity remains high. If you want all kinds of non-economic good things, Friedman says--like openness of opportunity, tolerance, economic and social mobility, fairness, and political democracy--rapid economic growth makes it much, much easier to get them.

Consider, for example the case of Japan during the Great Depression in the 1930s. Rising unemployment and declining incomes in Japan in the 1930s certainly played a major role in the assassinations and coups by which that country, which was a functioning constitutional monarchy with representative institutions and a government focused on economic development in 1930, to a fascist military dictatorship by 1937--a dictatorship that could be dragged into a major attack on China by the initiative of relatively low-ranking military officers in the region of China that they had occupied and called the puppet state of Manchukuo. In western Europe the calculus is equally simple: had there been no Great Depression in Germany in the 1930s, there would have been no Adolf Hitler in power, no Nazi dictatorship, and forty million fewer Europeans would have murdered in the 1940s. The saddest book on my shelf is a 1928 volume called Republican Germany: An Economic and Political Survey, the thesis of which is that after a decade of post-World War I political turmoil, Germany had finally become a stable, legitimate, democratic republic. And only the fact that the Great Depression came and offered Hitler his opportunity made it wrong.

We are all very fortunate that we live in a world in which the great powers of 1940 took action--even if their action was much too long delayed and much to hesistant--to destroy the German Nazi and Japanese Fascist-Militarist regimes. Winston Churchill's pushing British Prime Minister Neville Chamberlain and French Premier Edouard Daladier to declare war on Nazi Germany in 1939, and Franklin Delano Roosevelt's ultimatum to Japan to withdraw its military from China or face a complete embargo on exports of oil from the United States, the Middle East, and Indonesia were acts of great statesmanship in pursuit of world peace. But would World War II have taken place in the absence of the Great Depression? Probably not?

Even in the United States--where we Americans believe that our political democracy and obedience to the order of law are unshakeable--the 1930s were a politically tumultuous decade. The story of Huey Long in Louisiana (fictionalized in Robert Penn Warren's brilliant novel All the Kings Men, crypto-fascist radio broadcasters like Father Coughlin over the airwaves, California's treatment of Depression-era migrants from other states that we read about today only in The Grapes of Wrath, and the white-hot hatred for Roosevelt as a class traitor--up until his dying day, my grandfather who lived to be 98 would still say the country was lucky to have survived Roosevelt.

And, of course, I draw powerful lessons from Friedman's argument. I consider that there are some today in Washington who look forward to a future in which China is in some sense America's "enemy" and that "national greatness" requires that the United States fight a new Cold War in Asia. There are those who work for Vice President Cheney's office who think that trade with China is a bad idea: it creates a pro-China lobby that will stop any attempts by the United States to slow down China's growth and acquisition of technology. Better, they think, to try to keep China as poor and barefoot as possible for as long as possible.

From my perspective, this is totally insane. In all likelihood, China a century from now will be a full-fledged post-industrial superpower whatever the policies of the United States. The national interest of the United Staets is to maximize the likelihood that that superpower will have a representative government presiding over a prosperous, open, and free society? The China policy of the Clinton administration was to try to do whatever we could to speed China's growth in the expectation that rapid economic growth would have greatly beneficial moral, sociological, and political consequences for the evolution of China. As sociologist Barrington Moore wrote two generations ago, those countries that crossed the bridge from agrarian to industrial civilization most easily and peaceully were those with a rapidly growing, prosperous middle class will be interested in liberty and opportunity. Such a rapidly-growing Chinese middle class would be a much more powerful force for prosperity, opportunity, freedom of thought, and representative government in China than a battalion of lecturing neoconservative think-tankers in Washington D.C. or a host of remotely-guided cruise missiles on U.S. warships based in Pearl Harbor.

Let's all try to keep the bicycle that is modern China moving forward as fast as we can.

Comments

[Matt]

Ack. It is -not- true that angular momentum is what keeps a bicycle upright. There are three principal physical effects keeping a bicycle upright, and angular momentum is, by far, the least and weakest.

The two more important factors are both ways in which frictional forces between the bicycle wheels and the ground are redirected, via the bicycle's design, into forces that keep the bike upright. To get a feeling for this, imagine trying to ride a bike on a sheet of ice. Can't keep it stable, right?

The most important factor is the angle of the linkage between the front wheel and the bike's frame. If you hold a bike by the frame and tip it to one side, the front wheel will rotate. This rotation changes the direction of the frictional force between the bike and the ground so that it tends to push the bike upright.

The second stability factor is 'castering' of the wheels. When you push something on wheels forward, the frictional force between the wheels and the ground tends to make the wheels line up.

The effect of angular momentum, which is what keeps a rolling hoop upright, is a poor third.

[hack]

I was gonna point out that the angular momentum-bicycle stability thing is a commonly held myth, but someone already beat me to it. The "self-correcting" nature of the blogsphere operates on a very short time scale!

[Eric]

Of course, this raises a larger problem: Growth is indeed good, but barring the invention of advanced nanotechnology (a la Kurzweil), how can we support 6-10 billion people at US levels of wealth?

OK, we can dig up all the world's coal, convert it to gasoline, and burn it--which would get us through most of this century--but at the cost of flooding quite a few costal cities.

If never-ending growth is so important, we need to start thinking really hard about sustainability and exponential functions. Or at least hope Kurzweil stops obsessing about vitamins and Transcendental Meditation. :-/

[Michael Cain]

"OK, we can dig up all the world's coal, convert it to gasoline, and burn it--which would get us through most of this century--but at the cost of flooding quite a few costal cities."

Similar to the lines I was thinking along. If China and India were using energy at the per-capita rate of Japan -- the most energy-efficient large economy in the world today -- a back of the envelope calculation shows that those two alone would use a bit more energy than the entire world consumes today. At that higher rate of consumption, if coal is used to produce liquid transportation fuels as well as all the electricity we demand from it, coal doesn't last nearly through the end of the century, and the peak of production probably falls before 2050.

I always worry, as a technologist, when I hear non-technologists say that they know that human ingenuity and technology -- in this case, the scientists and engineers -- will come up with something. I worry that we did come up with something, beginning back in the 1950s. Fission breeder reactors are capable of providing the necessary amount of energy; given sufficient lead time, I believe all the objections about fuel reprocessing and waste disposal can be dealt with; but we've wasted an awful lot of the lead time. What happens if you've only got one answer, and the powers that be tell you it's not pretty enough?

[PCD]

The US bicycle is moving just fine but we seem to be going backwards.

[a different chris]

So who exactly wants to define "richer"?? Economists are yet waving their hands, again.

So, I'm gonna say, just for giggles, that we will all get richer at a rate of 3%/yr.

That adds up pretty fast. So, what will we have 30 years from now that will define us as "richer"?? Fifty years? One hundred years would pretty much be unimaginable. We currently need food, heat, shelter, companionship*, medical attention. Once the basics of the first three are met it becomes just status, doesn't it?

So it's the next two that are interesting to me. But if anybody can think of anything else...

*To me, that includes stuff like the blog right here thru the accessiblity of the arts.

[pat]

Beside the physics, there is also the possibility that the bicycle is moving fast towards a cliff ...

[anne]

http://www.nytimes.com/2006/01/05/business/worldbusiness/05yuan.html?ex=1294117200&en=907a4afb14d88062&ei=5090&partner=rssuserland&emc=rss

January 5, 2006

Speculators Turn Away From China, Making Revaluation Less Pressing
By KEITH BRADSHER

HONG KONG - After several years of pouring huge amounts of money into China, speculators have abruptly stopped doing so, reducing somewhat the pressure for the Chinese to revalue their currency and helping to bring inflation down surprisingly sharply.

The weakening of attention toward China by international real estate investors and especially by currency traders, economists said, is making it harder for the Bush administration to push the authorities in Beijing to allow their currency, the yuan, to rise against the dollar.

Hundreds of billions of dollars have flowed into China in recent years, driving the country's total reserves beyond Japan's, to $860 billion. But this fall, only half as much money flowed into China as a year earlier.

Investors in the once red-hot Shanghai property market are walking away, and currency speculators who had bet that China would sharply strengthen the yuan have pulled back as it became clear that the authorities favor a slow approach to currency appreciation.

The flow of money has diminished even with the rise in the Chinese trade surplus, which has tripled in the last year to the irritation of politicians and business executives from Washington to Brussels to Tokyo. They want Chinese officials to let the yuan rise faster to make the country's exports more expensive in foreign markets.

In July, authorities revalued the yuan only slightly after trading partners complained that its link to the dollar kept exports cheaper than they would otherwise be. That, combined with very low interest rates, damped investment enthusiasm.

The slowing of speculative investments "takes the pressure off" Chinese authorities to allow appreciation, said William Belchere, chief Asia economist at Macquarie Securities here.

The reduced speculation has brought measurable advantages as well: inflation has almost disappeared, even as the economy grew at a 9.8 percent rate last year. Economists attribute this in part to dwindling amounts of speculative money sloshing around the economy.

China has also enjoyed excellent harvests, and there has been so much investment in new factories that a recent government report estimated that three-quarters of all categories of manufactured goods suffered from oversupply.

"There's no pricing capacity for anything," said Jing Ulrich, a J. P. Morgan economist here. "Food prices are falling," she said, and those for manufactured goods "are seeing stagnation at best." ...

[dearieme]

I too have been beaten to the draw on bike stability, but may I at least suggest that whatever makes them stable be drawn to the attention of W.

[Arun Khanna]

Re: "John Maynard Keynes thought that at least the most prosperous of countries were on the verge of a cultural transformation: he thought that his peers' great-grandchildren would pursue not wealth and accumulation but rather human excellence and the cultivation of mental and aesthetic faculties."
I wonder if anyone has examined lives of heirs to great fortunes of 19th century America (and similar heirs in other countries). I won't be surprised if children of billionaires do not pursue wealth as much as their ancestors who created the family fortune.

[gordon]

So it was great that democratic, rule-of-law Powers including the UK, France and USA went to war in order to restrain undemocratic, tyrannical Powers which had turned to foreign aggression because of the Great Depression? The same Great Depression which arose from financial mismanagement on the part of one of those same democratic, rule-of-law Powers? And of course the war was to establish all those good things listed in, perhaps, the Atlantic Charter? Hmmm. The Atlantic Charter promises have been broken long ago. All the Allied Powers of WWII now themselves have the guilt of colonialism and/or aggressive war on their hands. Freedom from fear and want are unknown across vast areas of the Earth. And the use of force for National aggrandizement is as widespread as ever it was in the 1930s, but not because the colonialist and aggressive Powers have become suddenly poor.

If you want to find a reason for supporting economic growth, don’t use the 1930s as an example of bad things which could happen if it stops. Those bad things are happening anyway.

[Maynard Handley]

compare:
[why hunter-gatherer's should pursue wealth]
"But greater wealth for the band and the individual had very clear benefits: fewer of your babies died, you had a greater chance of living through the next winter, and you had a greater share of what comfort was attainable."

with
[Why agriculture was a bad idea]
"Malthusian population pressures have--until the last century or so--kept our numbers high enough relative to our technological expertise that the overwhelmingly large majority of humans have been close to the edge of starvation and well over the edge of malnutrition. "

Uhhhh --- isn't there a glaring contradiction here?
You can't go claiming that 8000 yrs ago the greatest good was fecundity and then, once agriculture increased fecundity suddenly comfort or lifestyle or something becomes the greatest good.

[Pancho Villa]

The saddest book (but also afaic the brightest) on my shelf doubtlessly is "THE ECONOMIC CONSEQUENCES OF THE PEACE"

Go, go Brad go!

[NinjaPlease]

I still fail to see how increasing china's economic bicycle is better than increasing the United State's economic bicycle.

China has a 100 million man standing army. Please explain how any revolt is even REMOTELY possible?

Cuba has an Old Guard, just like the former USSR did. When the Old Guard dies, changes happen, rapidly. China's old guard died long ago, don't expect economic change to bring about a revolution-minded middle class.

I'm sure you professors will understand when college tuition becomes prohibitively expensive due to the 3 class sytem becoming a 2 class system. When economist professors begin to be let go, or have their wages cut by dropping enrollment due to years of decline of good job availability and wages, only then will they begin to realize that pursuing the cheapest prices of goods is not the best thing, rather increasing the number of higher and higher paying jobs is. Low prices ALWAYS MEANS downward pressure on wages.

[Tyrone Slothrop]

N.B. --

The formatting of this post makes it difficult to tell where the quoted review ends and your comments begin.

[adam]

"...ruins his eyesight pouring over his accounts..." syrup? gravy? It really would make a mess of the books. Perhaps he was "poring?"

[Mark]

I once read an essay written by a 18th century Englishman talking about how much world population growth had sped up since the discovery of the New World. He went on to explain how within 200 years the population of the would could reach a billion, at which point logging "all the forests in Europe" yearly wouldn't be enough to provide adequate fuel for the winter. He made similar claims about farming capacity, using area/yield calculations to show it would be impossible to feed that many people.

Of course none of that came to pass. For the first time in human history obesity is a bigger global threat than under-nourishment. Likewise, the energy consumption per person is also at its highest ever. Even natural resources are becoming less expensive. (see Julian Simon's bet).

As for nanotechnology, forget the skepticism. The revolution is on. Dangerous minds are at work. Scientists, visionaries, and entrepreneurs are busy re-writing the rules of manufacturing, medicine and construction right now. If you think we've made astounding progress in the last 100 years (flight, computers, optics, nuclear power, relativity and quantum mechanics), then you'd better strap in and get ready for the ride of your life. This is one hell of a "bicycle" we're on.

[wjd123]

We didn’t get a large middle class simply by growing our economy. It grew because we had rules that made up our political economy. Now we are letting an amoral global system destroy the do and don’t of our economy. The result is a growing separation between the have and have-nots of our society.

[scottynx]

[and the white-hot hatred for Roosevelt as a class traitor--up until his dying day, my grandfather who lived to be 98 would still say the country was lucky to have survived Roosevelt.]
I would phrase it as "white-hot hatred" for a socialist. Though, to be fair, I do believe a little socialism (of the Roosevelt variety) is needed to stave off a lot of socialism. The question is what is the optimal "anti-communism insurance" amount?

[Tought]

Has anyone ever read the New Orleans Hurricane Preparedness Plan? It is 15 pages but worth reading. Think about the time line of Katrina, it was not a cat. 4 until Sunday Morning the 28th. The backup plan if there is not time to evacuate all, and there was not, is a shelter of last resort. The plan addresses the difficulties of evacuating over 100,000 people without transportation. How do you suggest you get that many people coordinated it 24 hours. The city did save many people from being in their homes when the levees gave way, the act that has caused the casualties and the state alerted the President who alerted FEMA on Sat. 27th that the huricane could be more than louisiana could handle, which is protocol and the Federal Gov. drug their feet in their responibilities. The tape was a way to try and help people to prepare themselves for the reality of a major hurricane, I saw the major exerts myself. Also, has Florida ever bused poor people without transportation out of the path of a hurricane? I do not know the answer to this question, I would realy like to know one way or the other.