America’s Superior Societal Capital

When discussing how to boost growth, economists often discuss the importance of human capital and physical capital.

Those are key factors driving economic performance. After all, improvements in human capital mean a more productive workforce. And improvements in physical capital mean greater output per hour worked.

So you can see why I want lower tax rates and less intervention. Simply stated, we’re far more likely to increase – and effectively utilize – human and physical capital when markets allocate resources rather than politicians.

But there’s another form of capital that’s also important. It’s difficult to measure, but I suspect it also plays a huge role in determining a nation’s long-run prosperity.

For lack of a better term, let’s call it societal capital, and it refers to the attitudes of a country’s people. I’m not sure how to define social capital, but here are a series of questions that capture what I’m trying to describe: Do the people of a nation believe in the work ethic? Or would they be comfortable as wards of the state, living off others? Are they motivated by the spirit of self-reliance? Would they be ashamed to go on welfare? Do they think the government is obligated to give them things?

The answers to these questions matter a lot because a nation can’t prosper once you reach a tipping point of too many people riding in the wagon and too few people producing.

Here’s what I wrote earlier this year.

…a nation is doomed when a majority of its people decide that it is morally and economically okay to live off the labor of others and want to use the coercive power of government to make it happen. For lack of a better term, we can call this a country’s Dependency Ratio, and it’s a measure of eroding social capital. To what degree, in other words, has the entitlement mentality replaced the work ethic and the spirit of self reliance?

I raise this issue because I want to share two items.

First, here’s some very good news about the United States. According to a new poll from YouGov about attitudes in the United States and United Kingdom, Americans are far more likely to believe they have a moral right to their earnings. Brits, by contrast, overwhelmingly believe that government has a greater moral claim to people’s earnings.

Makes me proud to be American, just as I was back in 2011 when reporting on some Pew research that also showed Americans had a greater spirit of self reliance.

The Brits, by contrast, seem to be moving in the wrong direction. Some of the blame belongs to supposedly right-wing politicians such as David Cameron, George Osborne, and David Gauke, all of whom have argued that people have a moral obligation to pay more to the state than is legally required.

In any event, it’s disturbing to see that people in the United Kingdom have such a warped moral perspective. Which raises the question of whether it’s possible to restore social capital once it’s been eroded?

Or is that a futile task once people have learned a dependency mindset, sort of like trying to put toothpaste back in a tube.

We have some research from Germany that offers guidance on these questions, which is the second item I want to share. Here are excerpts from a story in the Boston Globe.

…If you were a researcher trying to determine how a political system affects people’s values, beliefs, and behavior, you would ideally want to take two identical populations, separate them for a generation or two, and subject them each to two totally different kinds of government. Then you’d want to measure the results… Ethically, such a study would be unthinkable even to propose. But when the Berlin Wall went up in 1961, it created what London School of Economics associate professor Daniel Sturm calls a “perfect experiment.” …The two halves of the country were like a pair of identical twins separated at birth and raised by two very different sets of parents.

And what did this experiment produce?

The bad news is that living in a statist regime did erode societal capital.

…the researchers didn’t know what to expect. On the one hand, East Germans might be resentful of the system that had constrained their lives; on the other hand, it was also plausible that they had become comfortable with the notion that a government would provide for basic needs at the expense of an open society. Alesina and Fuchs-Schundeln used data from a German survey administered in 1997, and split the respondents into two groups based on where they had lived before reunification. What they found was that, at that point, people from the East still tended to believe in the social-service model. They were also more likely to support a robust government program to help the unemployed…

But the good news is that at least some of the toothpaste of self reliance can be put back in the tube.

It goes the other way too, if slowly: When Alesina and Fuchs-Schundeln looked at survey results from 2002, they found that the two groups of Germans had begun to converge politically. Based on the data, they estimated that it would take between one and two generations—20 to 40 years— for the gap to fully close, and “for an average East German to have the same views on state intervention as an average West German.” …In a separate but related study, it was shown that watching Western TV had actually shaped East Germans’ views about work and chance, making them “more inclined to believe that effort rather than luck determines success in life.”

So what’s the moral of the story?

I guess I’m a tad bit optimistic after learning about this research. I was worried that societal capital couldn’t be restored.

So maybe if we force everyone in Greece and Italy to watch my video on free markets and small government, there’s a chance those societies can be salvaged! (But let’s not show it to the French since we’ll always need bad examples.)

P.S. These two cartoons show the dangers of the entitlement mentality.

November 4, 2018 addendum: To be more precise, I’m now trying to use “societal capital” rather than “social capital.”