We Must Keep Growing

“In a world like the present one, when everyone is convinced that the material conditions here or there must be improved, the only chance of creating a wonderful world is for us continually to raise the general level of wealth.” — from Hayek’s The Road to Serfdom —

As Hayek emphasized, economic growth matters. It is the key driving force behind solving all kinds of problems. Yet economic growth is being neglected in our society. Why economic growth is important, what elements are needed for rapid growth, and what problems low growth or stagnation create have all been pushed out of the center of debate. Some even dismiss economic growth as something trivial. They tend to regard progress through growth as nearly impossible and instead become fixated on redistribution through government.

Since the 1980s, the dynamism of our society has gradually weakened, and our growth potential has continued to decline. Low growth is now becoming entrenched. It casts many shadows over our society. First, low growth and economic stagnation sap a society’s vitality and cause people to give up hope for the future.

The belief that tomorrow will be better than today, and next year better than this year, is a driving force in life. Confidence in progress leads people to work harder and invest more. Conversely, if people expect the future to be worse than the present and adopt a pessimistic outlook, they focus only on short-term consumption and turn away from long-term investment. Their rate of time preference rises to an extreme, and more people begin living extravagantly as though there were only today.

The recent problem of low birthrates can also be viewed in this context. Of course, as income levels rise and social structures change, there is also a tendency for preferences for marriage and childbirth to decline. But childbirth and childrearing are among the most long-term undertakings in a person’s life. For that reason, there is ample room to see extreme time preference as having affected the birthrate. Moreover, all parents want their children to live in a better environment than they did. If the future looks bleak, no one will readily want to have children.

Low growth also heightens conflict and antagonism among people. In a situation where the overall size of wealth is no longer expanding, an increase in one person’s wealth means someone else has become poorer. Human beings have evolved to be more sensitive to losses than to gains. That is true regardless of whether one was originally rich or poor. People born in the 1980s enjoy enormous material abundance compared with their grandparents’ generation born in the 1920s, yet they are by no means tolerant of losses.

In a society where growth has stalled, redistribution of wealth through the market process is a continuous source of pain. As noted above, because of our evolutionary inheritance of loss sensitivity, no one easily accepts a decline in income. In this situation, increasing one’s wealth is truly difficult. Like the Red Queen’s race, none of the participants in the market can rest. Nothing is as cruel as competition conducted within a zero-sum game. The most serious problem is the hostility and anger toward the market and competitors felt by those whose wealth has declined. Even if the cause lies in their own lack of ability or laziness, those emotions rarely subside.

It may be somewhat exaggerated to say that what people can least endure is the jealousy and envy they feel when others become better off than they are, but it is not entirely wrong. What they find even harder to bear is seeing their own situation worsen compared with the past.

Here lies the dilemma. Most people think envy and jealousy are the bigger problem until they themselves truly become worse off. Once they actually experience poverty, they come to realize that prosperity with some degree of inequality is better than equal poverty.

Those whose desires are great but whose abilities are lacking gradually begin appealing to politicians for redistribution of wealth. They organize people with similar interests and throw their votes behind the politicians most likely to guarantee their group interests. Corrupt politicians who represent group interests rather than the general interest of society come to dominate the government or the National Assembly, and rent-seeking becomes widespread. Eventually, even highly productive people realize that working harder has become meaningless and make extreme choices. They either flee abroad or join the same kind of group egoism that appeals to political power. The movement toward big government accelerates, and in the process individual freedom is increasingly suffocated.

The wealth destroyed in the process of redistributing wealth through government power is enormous. The wasted costs include the incentives destroyed in the process of taxation, the costs squandered on tax avoidance, the administrative costs of tax collection itself, corruption among tax-collecting officials, social conflict arising from setting the criteria for tax distribution, additional hiring of public officials to carry out various distribution policies and the costs involved, and the corresponding reduction in labor supply to the private sector. All of these are forms of waste generated in the process of redistributing wealth. There is almost nothing for us to gain while bearing such losses.

Let us again consider what we truly want. Among the various problems we face in reality, what are the things we wish to see improved? Larger homes, a greater variety of clothing, tastier food, more roads and railways, higher-quality education, more medical facilities, more leisure time… The only way for all of us to enjoy these things without sacrificing anyone is economic growth.

Of course, economic growth cannot solve every problem. For example, it cannot solve economic inequality. But economic growth does not worsen inequality, nor do policies that sacrifice growth in pursuit of equality actually alleviate inequality. As Ayn Rand, author of Atlas Shrugged, said, “Capitalism did not create poverty. It inherited it.” Likewise, capitalism did not create inequality. It merely inherited it.

Some complain that economic growth does not make people happier. Certainly, the absolute size of wealth does not determine happiness. But poverty generally makes people unhappy. Sometimes people discuss the utility of economic growth using bogus indicators such as national happiness indexes, but this is a kind of straw man argument. On this point, Mises said the following in his book Liberalism:

“Liberalism is concerned solely with men’s material well-being not because it values the spiritual side of life less, but because it is convinced that what is highest and deepest in man cannot come to him from without, but must originate within his own heart. It seeks to produce only the outward well-being because it knows that inner, spiritual riches cannot come to man from outside, but only from within himself.”

A certain economic scale does not make rapid economic growth impossible. The key to economic growth is the guarantee of economic freedom. When economic freedom is broadly guaranteed, capital accumulation becomes active, and through capital accumulation we can produce more and a greater variety of goods and services. On the contrary, the mistaken prejudice that economic freedom widens the gap between rich and poor is the fundamental reason we have been unable to escape the swamp of low growth.

Historical experience shows that regimes obsessed with equal distribution rather than economic growth ultimately made people worse off. Far from achieving their goal, they instead deepened inequality and ultimately brought about economic stagnation. As a result, social discontent grew and conflict and antagonism among members intensified. In the end, the goal we should focus on is no longer equal distribution or expanded welfare by the state. As the saying goes, jobs are the best welfare; welfare through economic growth is our true goal.

Economic growth is the ultimate solution that reduces social conflict while also making it easier for each of us to achieve the goals we want in life. As philosopher Jordan Peterson said, “Compare yourself to who you were yesterday, not to who someone else is today.” What we should compare is not the “relative” wealth gap between ourselves and others, but how much our “absolute” wealth has grown compared with the past.

Sangwoo Song / Vice Chairman, Society for Economic Evolution Research; Korean medicine doctor

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Original title: 우리는 계속 성장해야 한다

Author: Sang-woo Song

Date: 2018-10-03

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=16&idx=11135