12 September 2014
Restructuring Economies, Transforming Societies

Restructuring Economies, Transforming Societies

Sustainable wellbeing requires not just economic restructuring but also social transformation, argued Dennis Snower in his opening address to this year's Global Economic Symposium.

Sustainable wellbeing requires not just economic restructuring but also social transformation, argued Dennis Snower in his opening address to this year's Global Economic Symposium, held in Kuala Lumpur on 6-8 September. Snower is President of the Kiel Institute for the World Economy, which organizes the Symposium.

Here is the full text of Snower's excellent speech:

As the global economy has become increasingly interconnected, humanity’s problems have become increasingly interconnected as well. The “orphan problems” – ones that no single country is willing or able to tackle on its own – are multiplying: public goods problems (such as climate change, financial crises and security threats), commons problems (such as resource depletion, pollution and biodiversity loss) and poverty (including malnutrition, health problems and disempowerment of women).

Many, including myself, believe that these myriad problems are merely symptoms of a profounder underlying cause, namely, that the world is undergoing a Great Transformation. By this, I do not mean a global shift that is in the news (such as the shift of economic power from rich to emerging countries), but a transformation that changes everything: the basis of our relationship to our environment, our ways of life and, consequently, the nature of our social relationships in interaction with our economic relationships.

A suitable metaphor, as we shall see, for interlocking economic and social relations is a tree. Just as the branches of a tree are nourished by the roots and vice versa, so the economy is nourished by society and vice versa.

A Great Transformation occurred with the domestication of animals around 8-10 thousand years ago, which permitted the transition from foraging to farming. Farming, in turn, led to more abundant and dependable sources of food. It also led to a sedentary life in settlements that eventually turned into cities.

The cities necessitated political and social changes to secure access to food and resources as well as protection from plunder, ushering in the Transformation to empires: the Chinese, Mongol, Roman, Arab and other empires.

In some regions, empires that could not secure their land ceded much power to the hereditary rule of lords over their fiefdoms, with the support of vassals who provided services to their lords in exchange for protection and the use of land. Thus occurred the Transformation to feudalism.

In Europe, another Great Transformation was that to the organization of skilled work in guilds, controlling the practices of a craft in urban centers, combined with inter-regional trade among merchants.

This prepared the way for the Industrial Revolution, which gave us machines that enabled us to overcome the constraints of muscle power in manipulating our environment.

Many nowadays believe that we are currently witnessing the beginnings of another Great Transformation but its distinctive characteristics are not yet clear. It may well involve some amalgam of Digital, Biotech-, and Nano- Revolutions, combined with a revolution of social interaction, connecting people across national and cultural boundaries.

You will have your own conjectures. I encourage you to share them with us, along with your thoughts about past Transformations, by posting your thoughts on the time lines on the walls outside.

In both the rich and the emerging countries, there is a sense of radical change in the air. Mainstream economics offers a straightforward analysis and policy response to such change. Whenever technological or other changes permit people to be compensated for the costs and benefits they confer on each other, the market system ruled by prices can provide efficient adjustment. But when the changes create externalities, then economic restructuring is required – such as levying taxes and subsidies, imposing economic regulations, redefining property rights, reformulating laws of crime, property and contract – to make up for the uncompensated costs and benefits. And when the changes give rise to unacceptable inequalities of income or wealth, then the requisite economic restructuring takes the form of redistributive measures.

The rationale for this approach is the presumption that if everyone is fully compensated for all the costs and benefits they provide to others, then individuals pursuing their own self-interest will be led, as if by an Invisible Hand, to serve the public interest as well, apart from inequalities that can be tackled by redistribution policies.

This presumption is based on the assumption that everyone is Homo Economicus, a self-interested, rational individualist. Clearly the only way to induce self-interested, rational individualists to cooperate with one is through economic synergies, enabling them individually to reap gains from trade.

The theme of this Global Economic Symposium suggests that this mainstream economic approach to change is inadequate. The theme of the Symposium implies that economic restructuring requires social transformation, and vice versa.

This claim can be understood quite simply by means of a few examples. Why are recycling policies in developed countries so much more effective nowadays than they were 30 years ago?

Many countries had similar combinations of subsidies, penalties and regulations then as now, but then few people took notice. Why do employees’ absences from work depend much more on the average rate of absenteeism at their place of work than on the financial disincentives?

In these and countless other cases, just focusing on individualized incentives misses the point. People’s responsiveness to these incentives depends on their social affiliations, and the associated norms and values.

The reason why Prohibition was not successful in inter-war America was that the economic sanctions against alcohol were not matched by the social norms of many citizens. There are analogies here to aspects on the war on drugs.

The reasons that China became an economic superpower after the economic reforms introduced by Deng Xiaoping were not merely changes in economic laws – decollectivization of agriculture, laws allowing local people to start businesses and laws allowing foreign investment, privatization and contracting out of much state-owned industry, lifting of price controls and protectionist regulations, and so on – but also changes in social norms away from the anti-entrepreneurial ones of the previous Communist regime to those of “Socialism with Chinese characteristics.” The reasons that India’s economic development has taken off as well were not just its economic reforms starting in 1991, but also a social revaluation away from the old caste system – in which the working Shudras and the entrepreneurial Vaishyas were viewed as discreditable – towards capitalist values and affirmative action for the economically disadvantaged.

When Saddam Hussein’s regime was toppled in 2003, U.S. politicians expected the Iraqis to respond by exploiting all their newly available economic opportunities. Homo Economicus would have done so, but the Iraqis didn’t.

What went wrong?

No doubt there was not enough law and order to enforce all the relevant economic contracts. But whenever law and order is deficient, Homo Economicus would do more to embrace law and order, because that is what self-interested, rational individuals would do to maximize their utility. Besides, in countries with well-functioning markets, contracts are imperfect – specifying only a fraction of the relevant rights and duties – and often impracticable to enforce.

Contracts tend to be honored voluntarily, not through enforcement. What makes market economies function well is not a policeman protecting every shop window, or a lawyer overseeing every employment contract, but because people have enough trust, trustworthiness, fairness, and fellow-feeling to honor their promises and obey the rules. Where this social glue is lacking – Israelis versus Palestinians, East versus West Ukranians, and so on – people can’t exploit all the economic opportunities available to them.

In short, well-functioning economies require socially integrated societies. Cooperation in the economy requires cooperation in society. If people would steal, cheat, intimidate and kill whenever they were given a reasonable chance of getting away, no market economy would survive a day.

The same is true for politics. Without social affiliation, there can be no legitimacy of government. The reason why Europeans perceive a “democratic deficit” in the European Union and resist mutualizing national debts, is that they lack a strong European identity. Malaysia achieves political legitimacy and economic prosperity pursuing policies that offer a common home to its Chinese, Indian and Malay populations. As the Prime Minister of Malaysia stated at the 65th session of the U.N. General Assembly in 2010, “1Malaysia is a vision that seeks renewal and rejuvenation to bring all our people together in a just and harmonious relationship.”

Mainstream economics has been blind to the social underpinnings of market economies. Our understanding of human nature must progress from Homo Economicus to Homo Socialis. Since people are not exclusively self-interested, rational individuals, their economic cooperation rests not just on economic synergies – as mainstream economics maintains – but on social forces such as care, reciprocity and fairness.

Economic transactions do not just satisfy the individual’s self-interested preferences, but most have deep social significance. When people acquire expensive cars, designer clothing and opulent houses they generally seek social standing. When married couples or friends go out for dinner, give presents to one another, and go on holiday together, they perform economic transactions inspired by affiliation and care.

In short, mainstream economics is aware of only half of what makes us human: our individualistic side, not our social side. When we look at a tree, we see only the trunk, branches and leaves; the equally extensive system of roots remains invisible. But when the roots are damaged, the tree ails or dies. Our vision overlooks the roots, much as mainstream economics overlooks the social capacities of human nature.

This oversight is particularly crippling in times of Great Transformation. The reason, of course, is that during each Transformation the foundations of society are utterly transformed. For example, the Transformation to the Industrial Revolution involved the separation of work from private life and of consumption from production, which came with the spatial division between factories and homes. At the same time, the industrializing societies witnessed a transformation of values, whereby the city-dwelling entrepreneurs, managers and workers – not previously held in high regard by the aristocracy, clergy and peasantry – gained pride and purpose and social standing.

Mainstream economics – with its emphasis on production functions with its single-purpose factors of production, the division of labor and the gains from trade – reflects the industrial-age organization of the economy and society.

The world now appears to be headed for another Great Transformation, accompanied by seismic economic and social changes. At present, we live in an economically integrated, but socially fragmented world. Economic globalization is steadily creating new opportunities for economic cooperation. But the correspondingly global social cooperation has been hampered by our divided identities. The world is divided into a multitude of nation-states, each controlling many of the instruments of public policy. People’s allegiances are further divided into a variety of religions. Race, class, occupation and gender are often also compelling sources of social allegiance. And where the social barriers among people are sufficiently strong, the economic barriers are certain to appear. We all recognize symptoms of this problem – extending from protectionism, increasingly fierce immigration controls, and secessionist campaigns to religious and nationalist insurrections, religious wars and ethnic cleansing.

In the Great Transformation that is emerging, our economic success will depend vitally on how we view our social affiliations. One view is that our identities are immutable, impermeable, exogenously given, and intrinsically opposed to one another. This is a classic dichotomy of good versus evil, us versus them. It leads to empathy and compassion to one’s in-group and implacable conflict with the out-groups. With regard to religions, it implies a chasm between the believers in the one true religion and the unbelievers. With regard to nations, it involves glorification of national history, geography, language and culture, along with suspicion of rival nations. This view is has been an endless source of conflict throughout history – conflict that cannot be resolved, since good and evil are projected onto irreversible social categories.

But another view is possible, one firmly rooted in insights from neuroscience, psychology, anthropology and sociology. It is that we each have multiple identities, that the salience of these identities depends importantly on our motivations and circumstances, and that we generally have significant latitude in choosing these identities.

None of the world’s great religions is based on texts with uncontested meanings. Different interpretations have generated different religious identities. The history of religions is not just a tale of conflict, but also one of tolerance, creative interaction, and cross-fertilization of ideas.

Needless to say, this view doesn’t deny that our national and religious identities are of profound importance. Rather, it helps us realize that we are co-creators of our identities. We can choose identities that divide us, making it impossible to tackle the global problems that are multiplying around us. Or we can shape our identities so as to widen our circle of compassion and moral responsibility. A growing body of scientific evidence shows that, like any other skill, compassion and responsibility can be trained. Like literacy and professional qualifications, it requires time and effort. Like our cognitive abilities, schools and universities could develop our caring abilities.

We must craft our social settings so as to give people of diverse backgrounds a superordinate goal, encouraging them to define themselves by a common achievement. Where our problems cross national and religious boundaries, we must construct assignments and institutions that induce people of different nations and religions to tackle these problems together and thereby share a sense of the common good. There are many ways of doing this, from conflict resolution workshops to reconciliation commissions, and from cross-cultural education programs to compulsory civic duty for school leavers.

When mainstream economics tells us that people cooperate only to exploit economic synergies, it blinds us to our innate capacities for care, reciprocity, fairness and moral concern. We must work towards a society and polity that gives emphasis to our most inclusive moral values – such as the Golden Rule, central to all the great religions – and give dignity to those artists, employers, and public servants who devote themselves to widening our horizons of compassion. In building social affiliations that match our needs for economic cooperation, we will help lay the groundwork for a peaceful, fulfilling future for all.
Tags: asean, restructuring economies, transforming societies, global economic symposium 2014, dennis snower

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