Why the rich must get richer

In his book, "The Moral Consequences of Economic Growth," Benjamin Friedman, a professor of economics at Harvard University, explores an argument made by Adam Smith in the 18th century that a society experiencing economic growth is likely to be happier and more successful than another that is not, even if the no-growth society has achieved a higher (but stagnant) standard of living.

Friedman says the value of a rising standard of living lies not just in the concrete improvements it brings to how individuals live but in how it shapes the social, political and ultimately the moral character of a people. He believes people's sense of well-being is essentially relative.

Consider:

People become accustomed to any fixed standard of living, rich or poor; they are happiest if they feel their standard of living is rising (something, in principle, all members of a society experiences at once), or if they feel they are better off than their peers (which is divisive and not an aspiration everyone realises at once).

The key is the way these two standards interact; if people are becoming better off relative to their own standard of living, they will care less about where they stand in relation to others.

If they are not growing better off relative to their own past standard of living, they will care more about their placing in relation to others – and the result is frustration, intolerance and social friction.

Growth, in short, has moral as well as material benefits, says Friedman. Furthermore, economic policy needs to take account of the role of externalities if growth is to provide the maximum social and economic benefit. And if he is right about the moral benefits of economic growth, then growth itself involves an externality – not a negative one, like pollution, but a positive one.

Source: Why the Rich Must Get Richer, Economist, vol. 377, no. 8452, November 12, 2005; based upon: Benjamin M. Friedman, The Moral Consequences of Economic Growth, Knopf, October 2005.

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For more on Economy: http://www.ncpa.org/iss/eco/

FMF Policy Bulletin/ 07 March 2006