How can we achieve better socio-economic outcomes?
Incomes, net worth, choices in life, health and social cohesion all help constitute socio-economic well-being. How can we achieve better socio-economic outcomes in future?
Good socio-economic outcomes are determined by environmental (when and where we are born) and social factors (who our parents are etc.) Economic performance is also shaped by history, resource endowments, institutions, and supporting cultures and civil society. New Zealand has most of the conditions for better socio-economic performance and can do much better in absolute terms.
However, people are also concerned with their relative as well as real incomes and net worth. Income inequality relative to others is associated with bad outcomes such as crime and poor health. Relative income is a proxy for deeper variables, including psychological mechanisms associated with perceptions of status within hierarchies.
People do not so much aspire to equality as to fairness. Even hard-headed businesses pay over the market wage for fairness, reciprocity and to support group norms. Perceptions of procedural fairness better predict compliance with organisational norms than do specific rewards and punishments.
The best-performing societies and economies share common features including:
- Strong government
- Inclusive and responsive government
- Rule of law, and rights
- Effective property rights
- Macroeconomic stability and microeconomic flexibility
- Market economy and trade betterment
- Public goods and infrastructure
- Strong and open institutions, including those promoting innovation
- Capability development
- Civil society and social engagement, and trust in society
A strong government must make and enforce laws and regulations. It needs to guard against internal and external threats through policing, military and security services.
It is fitting that the preamble to the Treaty of Waitangi focuses on creating an authoritative government that can create and maintain order. Private and customary institutions cannot by themselves provide an institutional framework for social order for an effectively functioning economy.
Inclusive and responsive government
High quality of life and socio-economic prosperity depend on inclusive and responsive government. This must be underpinned by universal suffrage and individual rights. While physical laws and resources may be immutable, there is unlimited human imagination and individuality. Individuals have unique perspectives, but people in the same position need to be subject to common rules, rights and policy settings.
People compete to control a society’s rule-making. Elected and popular governments must moderate competing claims within a society, and must reflect peoples’ democratic will. However, to protect individual rights from unfair majoritarian rule they should also be restrained by other institutions such as common law, constitutions (including those governing voluntary and community groups), social norms, the rule of law, and rights.
Rule of law and rights
Credible rule of law requires that the law bind the state and that the executive and judiciary are separate. Complementing and moderating central and local government law and regulation are contract law, common law and supporting institutions. Rights in law need to be tightly defined and enforceable, and remedies should be linked to underlying rights.
A good society depends on property rights, political rights (the right to appoint and dismiss governments) and civil rights. However, different groups in society have different interests. Property rights may be especially important to capital owners, and political rights to the majority who may vote for redistributive policies and better public services. Civil rights are of special interest to minorities who may lack both wealth and the numbers to make their voice known through the polls.
These three types of rights – property, political and civil – are related. They should be managed in complementary not conflicting ways. For example, the apartheid era white minority in South Africa bargained and exchanged away their dominant political rights for property rights and civil rights. The white minority in Zimbabwe failed to do so and got a worst outcome.
Of all rights, effective property rights are most important because they underpin political and civil rights and make economic growth and wellbeing possible.
Effective property rights
Property rights are legally mandated claims over resources. They are intertwined with human rights. They protect individuals, families and minorities against predatory governments and criminals. They place value on and protect environmental resources. They create incentives to plan and work for the long-term and they encourage capital formation that lifts labour productivity. They allow workers to trade their labour inputs in markets that reward them, and allow innovators to capture rewards from their innovation. They underpin markets and pricing systems and allow trade to occur.
Strong property rights give people a castle from which they can express their personal and cultural freedom. They allow individual and family self-determination.
Effective property rights require clarity of title and excludability, tradability, ability to be represented in an abstract form, and integration into a quality information system:
Clarity of title and excludability
Property right titles must be clearly defined and linked to specific owners. The nature of property, the boundaries around it and its title must be explicitly described. Property rights must be exclusive if they are to be valued and used productively.
Tradability of property is needed to realise value and ensure resources move to their highest valued use. Without tradability, property managers lack incentives to manage their assets efficiently and are deprived of their full benefits.
Representation of property in an abstract form
In developed countries, assets are integrated into market representational systems that integrate dispersed information. In less developed countries assets may be extra-legal and their use limited to a small group.
Complex market economies and trade depend on the ability to connect tangible physical property to intangible abstract rights. This allows property to be leveraged for such purposes as securing utility services, borrowing, accessing risk management services such as insurance, entering into and ensuring enforcement of contracts and conferring rights of succession.
In less developed countries many people own substantial property. However they cannot leverage that property. Without this and quality property information systems, utility providers lack confidence to connect electricity and telecommunications to slum dwellings, black markets emerge, taxes are evaded and public services stagnate.
Integrated into a quality information system
Property must connect to an information system that records property and tracks transactions and claims related to it in a public, accurate and verifiable way. Quality property information systems must be public and generalised not limited and particularised. They need to be protected from institutional failure.
The 2008 Global Financial Crisis (GFC) was associated with financial derivatives, credit default swaps and bundled and leveraged mortgages becoming too disconnected from underlying real property. Property information systems became unable to relate abstracted rights and claims to specific property. This meant, for example, that some mortgage foreclosures were unlawful because it was impossible to trace a particular mortgage to an actual property.
The property rights information system had therefore become particularised, opaque and private, not generalised and public. It is always government’s role to police standards, weights and measures. If we have a Metre Convention why do we not have a Convention to protect accurate public records of property rights and transactions relating to them?
Macro-economic stability and micro-economic flexibility
Macro-economic stability and microeconomic flexibility are both critical to high performing economies and are mutually reinforcing. Stability requires such foundations as an independent Reserve Bank, flexible exchange rates, sound money, ways of storing and protecting wealth and a prudently regulated financial sector.
Flexibility is needed to allow resources to shift with demand in ways reflecting human individuality and creativity, dispersed information, and the highly differentiated and dynamic nature of modern economies. Supporting institutions are needed to minimise market abuses and to allow people to adapt to change and stay connected to and make a positive contribution to society.
Market economy and trade betterment
Rising prosperity depends on trade betterment, including free entry to markets and innovation.
Throughout history, the merchant, professional and business classes engaged in trade betterment have been stigmatized in folklore, literature and popular culture. Stigmatisation turns individuals into abstract, dehumanised stereotypes. This can become especially toxic when these stereotypes are associated with minority ethnicities or with stigmatised social classes such as kulaks.
History is littered with attempts to do away with private property and trade betterment and create utopian communities populated by “ideal people” behaving in ways anathema to human nature. Shakespeare spoofed this in The Tempest:
In the commonwealth I would by contraries
Execute all things; for no kind of traffic
Would I admit; no name of magistrate;
Letters should not be known; riches, poverty,
And use of service, none; contract, succession,
Bourn, bound of land, tilth, vineyard, none;
No use of metal, corn, or wine, or oil…
All things in common Nature should produce
Without sweat or endeavour…
Nature should bring forth,
Of it own kinds, all foison, all abundance
To feed my innocent people.
Trade betterment, competition and some level of inequality it gives rise to are needed for human advancement. Free entry to markets is associated with property rights, human rights, freedom of association and with other-centredness.
Customers and customers cannot be forced to buy in a market. Those that want to sell to customers need to see through their eyes, respect their autonomy, and meet their needs.
Economic growth strategies can focus on markets and trade betterment or on political lobbying and state-driven solutions. Market economies that protect property rights and trade betterment provide the best route for advancement. Effectively functioning markets require supporting institutions to prevent exploitation of market power.
Capability development related to education, home ownership, compulsory or subsidised savings and financial literacy are also needed to allow people to fully participate in market economies and to minimise inequality.
Politics is vulnerable to manipulation of political, regulatory or social rules to protect privileged interests or to increase prices or returns from existing assets, rather than creating new wealth. Rent-seeking behaviour can cause net economic loss by reducing allocative efficiency and diverting resources away from production into lobbying, litigation and other such activities. People with credentials but few marketable skills can have a sense of entitlement and turn to politics to leverage opportunities unavailable in private markets.
Politicians and lobbyists can promote a sense of entitlement or grievance and create a psychology where people feel that “others” or “history” are limiting what they can achieve in the economy or society. This reduces the incentives for the education, labour market performance, asset creation and business entrepreneurship that creates new wealth, and it instead focuses people on political lobbying.
Public goods and infrastructure
Public goods need to be publicly provided. Economic agents must be rewarded for their positive externalities, and should bear the cost of their negative ones. Public goods and wider public interests can require the state to exercise its eminent domain powers, for example to acquire private property for a public purpose such as infrastructure development. This should follow due process and include adequate financial compensation for takings.
Goods best provided publicly include infrastructure such as roads, railways, telecommunications, electricity and water supplies. These are fundamental to society and have a human rights dimension. For example, communications infrastructure is needed for freedom of association. Infrastructure can also overcome economic geography constraints.
People by and large do better in cities because of better infrastructure, more ideas and richer labour markets. However, economic geography can also impede economic efficiency and social mobility even in large cities. For example, there can be a structural mismatch between affordable housing and where in a city jobs are located.
Poorly educated people may stay in parts of a country where there are thin labour markets, low incomes and often high unemployment. In such communities, the unemployed may impose negative externalities on those around them. Quality communications infrastructure helps address these problems.
Strong and open institutions
Institutions evolve to deal with such problems as economic distribution, conflict resolution, and protection of rights. They require time, social mandate, strong government, rule of law, and the civil society and social norms that reinforce them.
High quality institutions are generalised rather than particularised. Generalised institutions are open to everyone and permit open trade and exchange between parties. A particularised institution is based on privileged interests or on discrete, non-economic characteristics such as race, ethnicity, religion or gender.
Open and generalised institutions support growth and human rights, closed and particularised ones don’t. Likewise, successful social movements and institutions arise from openness to outsiders. Jesus was a leader of one of many tiny Jewish sects, most of them exclusive. His sect won out because it was open to Gentiles and women and overcame racist and ethnic barriers to entry to what was an inclusive sect among exclusive rivals.
International market trade has become the most open and transformative of all institutions. Its symbol, the World Trade Centre is in ruins. However, its unbroken heart has lifted humanity out of poverty and become the dominant driver of human behaviour and resource allocation.
Institutions also need supporting social capital, practice and norms. Humanism, an international secular belief system based on liberties, high culture and human unity, is a form of social capital that underpins generalised institutions open to all. However, social capital can also be used to create particularised identity-based groups that share social capital within but not outside the particularised group.
Institutions that evolve and develop locally tend to be deeply embedded in society and link to local knowledge and practice. They give rise to and are reinforced by social norms. The Balinese system of irrigation management is a good example.
It is difficult to import and impose foreign institutions that are not supported by local culture and practice. The rapid recovery of Germany and Japan after World War Two illustrated the value of working with local institutions.
When US-led forces occupied Germany and Japan after World War Two they destroyed Nazi and Japanese Imperial powers but protected and leveraged off underlying local and democratic institutions and much of the central and local government infrastructure. Americans drafted the post-war Japanese constitution. However the Japanese modified it and translated it into a document they owned. Like the Treaty of Waitangi, there are differences between the English and the indigenous language versions.
Institutions, norms and practices can also be supported by political and symbolic narratives that manage change and keep people together. For example, after the downfall of apartheid Nelson Mandela connected to the white minority culture by wearing a Springbok jersey at the Rugby World Cup final in 1995. In doing so he showed respect for the minority culture and signalled acceptance of its passions as well as those of its institutions that were open to all.
Passive forms of social welfare that subsidise today’s consumption keep people out of absolute poverty but trap them in relative poverty since they have neither the means nor motivation to become more skilled and productive and to get ahead in life. Capability development rather than income support is required to promote wealth creation and asset formation across lifetimes and through generations. Support through capability development gives people the capabilities and mind-sets to enable them to earn more, build net worth and to self-determine their lives.
Education is society’s major investment in capability development. It buffers people from situational depravation and allows them to escape from it. For example, someone growing up in a single parent household may be situationally deprived. However, if a child’s solo parent is highly educated or has high aspirations then that child may be situationally but not culturally deprived. Outcomes for children in even one parent households are typically good where the parent is well educated.
Returns from education are distant in time, abstract, and may lack salience. People in poorly educated families lack exemplars and social networks that show what is possible and give guidance on getting there.
Savings, investment and forgoing today’s consumption to build capability development for tomorrow are discouraged where there is high effort-independent variance in economic outcomes. Institutions and social policy settings can reduce effort-independent variance and encourage future-oriented capability development. Safe, stable environments and nurturing parents help self-control and future focus while high variant, capricious social environments discourage it.
People’s innate cognitive biases such as short-termism lead to under-investment in education and low savings. Peer group pressure and prevalent family or other norms can encourage self-defeating behaviours such as low educational achievement, gambling, drug and alcohol abuse or criminality.
There are advertising pressures to consume and to take on debt. Debt offerings, whether in the form of bank credit or fringe lending, are framed in ways exploiting cognitive weaknesses. Lower socio-economic households tend to be short of energy, attention and time as well as money. Self-control is a limited resource, uses energy to exercise and can be depleted by use. Therefore children from lower socio-economic backgrounds focus on the short term at the expense of the self-control needed to support longer term educational and other development.
Connections to workplaces as well as educational institutions are also important because they make real what is otherwise abstract. Youth exposure to part time work builds social networks, work attitudes and social skills and helps transitions to adulthood and to higher level educational and labour market achievement.
While capability development must have strong origins in family environments, the state must play a role and encourage the right individual and family behaviours. Singapore in the post-war period went from a poor backwater with negligible resources to a highly developed and wealthy city-state. Lee Kuan Yee supported a culture in which individuals and families looked after themselves and were self-reliant. Adam Smith’s fundamental insight was that self-interest was the key driver of success, and when people focused on their self-interest the collective interest was fulfilled. Meritocracy, self-interest and reward for endeavour are not therefore class-based tropes and ploys but are rather key conditions of social mobility.
From the 1960s Singapore developed rapidly because it invested in capabilities and used this to drive economic growth and equity. It invested in education, home ownership and financial assets and avoided welfare-based passive dependency.
Singapore recognized that people needed external support and “ties that bind”, such as compulsory savings to complement their own self-regulation. Strict law and order and paternalistic policies such as bans on gambling and strictures against drugs removed temptations, enhanced self-regulation and helped people get ahead. Part of the philosophy was that he who might be free must first be bound. Singapore aimed to ensure everyone was on a development path and that a welfare-dependent underclass was not allowed to emerge. Singapore’s policies were supported by a culture of high savings, strong families and individual aspiration.
Challenges faced in countries such as New Zealand and Australia have been those of passive dependency. A capability development approach requires a move from the passive to the active, from the present to the future, and from consumption to investment in capabilities allowing enhanced future output leading to higher consumption over the longer-term. It also requires a greater focus on net worth and asset ownership.
Holding assets has wider spill-over benefits and can change mind-sets. It is associated with positive educational attainments for children. In changing thinking, asset ownership can lead to a virtuous circle with future-looking cognition causing savings and assets causing future-looking cognition.
How could the above capability development be actively applied in the New Zealand context? If we are ready for transformative ideas, passive consumption-based welfare such as Working for Families and other family support schemes could be converted into children’s individual development accounts to be used only for education, home ownership, business or financial investments to enhance future income-earning power and net worth. Such capability development can underpin equality of opportunity and social mobility.
Civil society and social engagement
If we develop people’s capability we expect that people engage with society and contribute actively to it. If one has a talent it should be leveraged and not buried in a field. Financial assets should be invested productively not speculatively or for arbitrage. Intellectual capabilities should do some good in the world and not be used for graft or rent-seeking.
Engagement in clubs, community groups and in voluntary organisations builds social networks and cohesion, shares knowledge, and leads to wider socio-economic benefits. Politeness and self-regard is both an input into such activities and a result of them, leading to regard for others.
Should you wish to explore these ideas further, the bibliography below is a start.
Acemoglu, D. Jackson, M. 2015: History, expectations and leadership in the evolution of social norms. Review of Economic Studies (2015) 0, 1-34.
Acemoglu, D. Robinson, J. 2012: Why Nations Fail: The Origins of Power, Prosperity and Poverty. Crown Publishers.
Boettke, P; Coyne, C; Leeson, P. 2008: Institutional stickiness and the new development economics. The American Journal of Economics and Sociology. Vol 67, No. 2.
Bynner, J. B.; Paxton, W. 2001: The Asset Effect. London: Institute for Public Policy Research.
De Soto, H. 2000: The Mystery of Capitalism: Why capitalism triumphs in the West and fails everywhere else. Basic Books.
Mullainathan, S.; Shafir, E. 2013: Scarcity: Why having too little means so much. New York, Times Books.
Offer, A. 2006: The challenge of affluence. Self-control and well-being in the United States and Britain since 1950. Oxford University Press.
Otsuka, M. 2003: Libertarianism without Inequality. Oxford, Oxford University Press.
Pipes, Richard. 1999: Property and Freedom. London, Harvill Press.
Sen, A. 1993: Capability and well-being. In M. Nussbaum and A Sen, eds: The quality of life, 30-53. Oxford, Clarendon Press.
Wilkinson, R.; Pickett, K. 2009: Spirit Level. Why more equal societies almost always do better. London, Allen Lane.