On crony capitalism

A good paragraph, from American Amnesiapage 97:

Government does not always work well — indeed, we wrote this book because it is working less and less well. And when well regulated, markets often work very well indeed. But there is no recipe for prosperity that doesn’t involve extensive reliance on effective political authority. The conservative vision of shrinking government to a size that will make it ‘safe’ from cronyism is the economic equivalent of bloodletting. The cure is far worse than the disease. Prosperous societies need a lot of government. Because they do, the incentives for rent seeking will always be present. Making a mixed economy work requires keeping that cronyism, and the other dangers we have recounted, within tolerable limits — and that requires not less government (or necessarily more government) but effective government.

Why did America get rich?

We published a piece last week at HBR.org by Martin Feldstein, the widely respected Harvard economist and conservative, in which he lays out ten reasons why the U.S. remains richer than its peers. It just so happens that at the same time I was reading American Amnesia, a defense of government and the mixed economy, by political scientists Jacob Hacker and Paul Pierson. And they offer their own ten reasons why economies grow. I thought it’d be instructive to compare them.

Here’s Feldstein:

  1. An entrepreneurial culture.

  2. A financial system that supports entrepreneurship.

  3. World-class research universities.

  4. Labor markets that generally link workers and jobs unimpeded by large trade unions, state-owned enterprises, or excessively restrictive labor regulations.

  5. A growing population, including from immigration.

  6. A culture (and a tax system) that encourages hard work and long hours.

  7. A supply of energy that makes North America energy independent.

  8. A favorable regulatory environment.

  9. A smaller size of government than in other industrial countries.

  10. A decentralized political system in which states compete.

Here’s Hacker and Pierson, on what they consider factors for why nations get rich that “would make most analysts’ lists”:

  1. private property rights and legally secure contracts backed up by an independent legal system;

  2. a well-functioning financial system, including a central bank to provide a common currency, manage the macroeconomy, and serve as lender of last resort;

  3. internal markets linked by high-quality communications and transportation infrastructure;

  4. policies supporting and regulating external trade and financial flows;

  5. substantial public investment in R&D and education;

  6. regulation of markets to protect against externalities, such as pollution, and help consumers make informed decisions;

  7. public provision of goods that won’t be provided at all or sufficiently if left to markets, such as public health;

  8. inclusiont o f all sectors of society in the economy, so that human capital isn’t wasted;

  9. reasonably independent and representative political institutions, so that elite capture and rent seeking aren’t rife; and

  10. reasonably capable and autonomous public administration–including an effective tax system that citizens view as legitimate — so that items 1 through 9 can be carried out in relatively efficient and unbaised ways.

These are very different lists, and they mirror America’s political divisions in fairly predictable ways. They disagree over the size of government, for example, and about unions.

Yet, there are some key themes. Scientific research makes both lists, as does education and the role of human capital in general. Effective government shows up on both lists, though the authors disagree about how to encourage it. A financial system that allocates capital well makes both lists, though again with different points of emphasis. Feldstein would likely agree that private property and secure contracts are critical; and I suspect Hacker and Pierson would agree that entrepreneurship belongs on the list.

A couple of years ago I posted about “How to promote economic growth, in one paragraph” and unsurprisingly there’s considerable overlap between that paragraph — by McAfee and Brynjolfsson — and the one I just wrote. In that paragraph, they emphasized education and investments in technology. Like Hacker and Pierson, they highlighted infrastructure.

It’s sometimes easier to talk about economic growth, I think, if you put size of government to the side to begin with. Economies grow largely because of the spread of new and useful ideas. Those ideas are often produced by government-financed research and disseminated by entrepreneurs. Every part of that process depends on people, which means that investments in education are critical. The role of finance is largely to fund that process.

If we can agree on that much, then we can debate the role of government with reference to it. As the two lists I started with show, there are aspects of economic growth where experts disagree. But it’s easy to overstate the disagreement. In fact, as McAfee and Brynjolfsson wrote in that Foreign Affairs piece a few years back, in terms of promoting growth “there is a near consensus among serious economists about many of the policies that are necessary.”

The status quo gap

Everything in America seems polarized right now, so perhaps it’s no surprise that innovation is as well. In Silicon Valley, a small fraction of the population wants to push every technical boundary, transform every industry, re-imagine every job, and re-engineer the limits of life itself. Meanwhile, much of the rest of the country takes solace in tradition, and seeks to preserve the way things are.

That’s the theme of my column in the latest issue of HBR, about a few new books and a film, all in one way or another about innovation. Here’s the gist:

Wolfe focuses on PayPal’s founder, Peter Thiel, and a cohort of teenagers selected by his foundation to forgo college and start companies, but she also lets us peek into a variety of tech subcultures—from seasteaders to polygamists to those who, like Thiel, chase immortality through investments in life-extending technology. The suggestion isn’t that these pursuits are inherently flawed; it’s that they stem from a single-minded desire to push boundaries—technological and social.

Meanwhile, in the rest of the country, Cowen argues, most “Americans are in fact working much harder than before to postpone change, or to avoid it altogether.”

The column covers The Circle, The Upstarts, Valley of the Gods, and The Complacent Class. But my deadline was in February, and since then I’ve read a couple books that feel relevant to this theme.

I wrote recently about A Culture of Growth, in which economic historian Joel Mokyr argues that the connection between intellectuals and artisans helped propel the Industrial Revolution. The cultural divide between Silicon Valley and the rest of the world doesn’t quite map onto Mokyr’s divide, but his broader point about the economic importance of connections between different parts of society surely applies here. The innovation sector works best when it’s attached to the rest of society — to scientists, intellectuals, politicians, and the public. When the divide between the innovative sector and the rest of society grows too large, bad things can happen.

A version of this shows up in Kurt Vonnegut’s first novel, Player Piano, which anticipates basically all of our current debate over artificial intelligence stealing jobs. In the book, the managers and the engineers are separated from the public, physically, as well as ideologically. Neither side ends up looking good, and the ending is not one we should hope for.

Evidence that too much social media is making us unhappy

We published a piece at HBR this past week on Facebook and well-being, by two researchers writing about their recent study:

Overall, our results showed that, while real-world social networks were positively associated with overall well-being, the use of Facebook was negatively associated with overall well-being. These results were particularly strong for mental health; most measures of Facebook use in one year predicted a decrease in mental health in a later year. We found consistently that both liking others’ content and clicking links significantly predicted a subsequent reduction in self-reported physical health, mental health, and life satisfaction.

My view on this has changed over the years, based on both research and experience. In 2012, I was skeptical about an Atlantic piece saying Facebook was making people lonely. It seemed more likely that lonely people were more heavily using Facebook. By 2013, I was at least willing to entertain the idea that social media was bad for us. By 2014, I was willing to say that “it depends,” and to acknowledge that the balance of evidence might be shifting.

Of course, it still depends. The impact of social media can be positive or negative, depending on a host of factors. But what if we’re just communicating with each other too much? At best, it seems social media is running into diminishing marginal returns; at worst, we’re on the other side of an upside-down-U. The internet lets us communicate with each other. As it spreads, people communicate more — email, then Facebook, then Twitter, etc. — and at first welfare improves. Then either welfare plateaus (diminishing returns), or it actually starts going down (upside-down-U).

Sure enough, the research we covered suggests something similar:

Overall our results suggests that well-being declines are also matter of quantity of use rather than only quality of use. If this is the case, our results contrast with previous research arguing that the quantity of social media interaction is irrelevant, and that only the quality of those interactions matter.

There’s some forthcoming research on the benefit to consumers from various online services. I’ll hopefully cover it when it’s out, but at a glance it suggests diminishing returns: the benefits of email are far larger than from Snapchat, for instance.

That’s starting to look like the best case scenario. Either social media is fine, but each platform isn’t much better than the one that came before, or it’s harmful, at least for the people who use it most.