Beyond capital and wealth: Challenges of the G20

Snower, Dennis J. Working Paper Beyond capital and wealth: Challenges of the G20 Economics Discussion Papers, No. 2017-91 Provided in Cooperation with: Kiel Institute for the World Economy – Leibniz Center for Research on Global Economic Challenges Suggested Citation: Snower, Dennis J. (2017) : Beyond capital and wealth: Challenges of the G20, Economics Discussion Papers, No. 2017-91, Kiel Institute for the World Economy (IfW), Kiel This Version is available at: https://hdl.handle.net/10419/171211 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Licensed under the Creative Commons License - Attribution 4.0 International (CC BY 4.0) Discussion Paper No. 2017-91 | November 07, 2017 | http://www.economics-ejournal.org/economics/discussionpapers/2017-91 Beyond capital and wealth: challenges of the G20 Dennis J. Snower Abstract The world is economically integrated, but socially fragmented. Thus economic progress can become decoupled from social progress. The G20 has traditionally focused on economic policy issues – economic growth and financial stability. This is appropriate as long as social progress is closely tied to economic progress, for then the achievement of material prosperity will promote human flourishing. But when economic and social progress becomes decoupled – as we commonly observe through growing income disparities, growing disempowerment and disintegrating social affiliations – then an exclusive preoccupation with economic policy issues is unlikely to quell the widespread public discontent. On this account, it is appropriate for the G20 objectives to be broadened to include resilient, inclusive and sustainable prosperity. These objectives must be attained with regard to more than material needs; they must also address the human needs for empowerment and solidarity. This wider conception of human needs calls for a new worldview to underlie G20 policymaking, one that generates social acceptance for multilateral cooperation in tackling multilateral problems, while allowing different countries to nourish different national, cultural and religious identities. (Submitted as Global Solutions Paper) JEL F5 H7 Keywords G20; governance; international cooperation; empowerment and solidarity Authors Dennis J. Snower, Kiel Institute for the World Economy, Germany, [email protected] Citation Dennis J. Snower (2017). Beyond capital and wealth: challenges of the G20. Economics Discussion Papers, No 2017-91, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2017-91 Economics Discussion Paper (2017–91)—submitted to Global Solutions Papers 2 We live in an economically integrated, but socially fragmented world. The forces of globalization have made the citizens of most nations economically interdependent, while national boundaries keep them socially disconnected. Under these circumstances, economic progress can easily become decoupled from social progress. That is the fundamental challenge of our age.1 It is a puzzling age. On the one hand, most people around the world are far more prosperous, healthier, better fed, less threatened by violence and live longer than ever before. On the other hand, in both developed and developing countries populism and nationalism, religious and ethnic conflicts are on the rise. Globalization is under attack; refugees in many parts of the world have increasing difficulty finding safe havens, public trust in politicians, business leaders, media and NGOs is falling across the G20 and beyond. Why are people so dissatisfied even though average living standards are higher than ever? Why have the rising living standards in developed countries had so little positive influence on selfreported happiness and the incidence of depression and suicide? Why do so many citizens believe that their political leaders are strangely disconnected from their troubles and fears? It turns out that the answers to these questions all hinge on the relation between social and economic progress. These answers have an important bearing on global governance, the role of the G20 in particular. The legacy of coupling We find these questions puzzling because our thinking has been shaped by historic events when social progress flowed from economic progress, so that what is good for the economy is also good for society. In the West, this was the legacy of World War II. The war had generated a sense of social solidarity; the postwar reconstruction was a massive exercise in empowerment. In short, citizens felt socially embedded and empowered; what they sought, after the privations of war, was peace and material prosperity. Success in achieving peace and prosperity sprung from pursuing free market activities, free trade, within constraints set by their democratically elected governments. The underlying worldview favored the postwar “liberal world order,” in which sovereign nations engaged in multilateral agreements, with the help of postwar institutions such as the United Nations, the International Monetary Fund, the World Bank and the International Bank for Reconstruction and Development. In the prosperous times that followed, governments offered their citizens increasing material security through steady expansions of public health, _________________________ 1 This theme is explored insightfully in C. Kelly and B. Sheppard, “Realigning Business, Economies and Society,” G20 Insights, Overarching Visions (http://www.g20-insights.org/policy_briefs/realigning-business-economies- society/). Economics Discussion Paper (2017–91)—submitted to Global Solutions Papers 3 public education, welfare and other social services. The tax-and-transfer system became more redistributive. After the collapse of the Soviet Union, this liberal world order was extended to the excommunist countries. Managed free markets and liberal democracy briefly came to be considered global normative ideals. Though this view of liberal democracy was soon to be challenged by Russia, China and others, managed free markets remained the avenue to greater material prosperity. This economic strand of the liberal worldview remains prevalent throughout the world. It is hard to overestimate the importance of these events – the end of World War II and the end of communism – in shaping the liberal worldview. This worldview rested on a few fundamental assumptions: The individual is the basic unit decision making. If left to their own devices, individuals make decisions that make them as well off as possible. Thus the freedom to choose is the individual’s most basic freedom. Social welfare is simply the sum of the welfares of all individuals in a society. Free-market economies are self-regulating systems that lead to efficient market outcomes, which no one can be made better off without making others worse off. Inequitable distributions of income can be corrected by redistribution policies, but only at the expense of efficiency. Liberal democracies enable voters to choose governments that provide the appropriate collective goods and undertake the appropriate redistribution. This liberal worldview implied the clear division of responsibilities among members of society: Consumers maximize their material wellbeing, businesses maximize their profits, governments make the rules that provide basic public services and permit free markets to coordinate economic activities, and supranational institutions permit mutually beneficial negotiations among national governments pursuing their own ends. Under this division of responsibilities, it was claimed free trade and free capital flows would, as if by an Invisible Hand, make everyone as well off as possible. Under these assumptions, it is easy to understand how economic progress came to be considered the driver of social progress. National economic performance is generally measured largely by gross national product (GDP) and national wealth. Business performance is measured by shareholder value. The resources that generate this wealth were conceived as “capital.” Machines and factories are “physical capital;” people’s skills are “human capital;” the stock of financial instruments is “financial capital;” natural resources are “natural capital;” and social attitudes such as trust, which promote human cooperation, are “social capital.” Capital is the input that produces material wealth. Wealth is what makes people happy. Then economic growth – rising material wealth – raises social welfare. The more widely the wealth is distributed, the more people become happier. When citizens are dissatisfied, their governments can come to rescue through wealth-creating policies. Economics Discussion Paper (2017–91)—submitted to Global Solutions Papers 4 Blindsided through decoupling Gradually, however – a starting in the 1980s and accelerating after the financial crisis of 2008 – social progress in the West became progressively decoupled from economic progress. This should not have been surprising. The solidarity from wartime efforts and the empowerment from postwar reconstruction faded with the passage of time. The need for economic security was increasingly addressed through rising government involvement in education, health, welfare and social security provision. Education and health services also promoted skill acquisition, leading to better, high-paid jobs. But while citizens’ desire for improved and more secure living standards was being addressed, their needs for solidarity and empowerment were gradually being neglected. The processes of globalization and technological advance – through out-sourcing, off-shoring and automation – disrupted long-standing workplace relationships as well as the associated social communities. The traditional nuclear families gave way to more flexible, often more short-lived arrangements. The social media restructured social networks, away from durable geographic affiliations towards transient electronic contacts among likeminded individuals. As Western consumerism penetrated progressively more countries and absorbed progressively more attentional space (through ubiquitous advertising and entertainment), long-standing cultural ties were undermined. Around the world, a disaffected class of young people was emerging, its members cut adrift from their religious, ethnic and national roots, increasingly addicted to consumerism, subjectively disenfranchised by blind global forces, and increasingly devoid of intrinsically meaningful pursuits. This development contributed to the proliferation of narcissistic gratification on the one hand and to a combination of nationalism and religious extremism on the other. At the same time, the rapid restructurings of global value chains – the relocation of segments of production processes around the world, to wherever per unit costs happened to be lowest at the moment – led to a spreading sense of economic disempowerment. The allocation of work around the global became dramatically more flexible, as costs of transporting information fell; but the flexibility of most people’s skills did not rise in tandem. Recent advances in digital technologies are enabling machines to take over progressively larger swathes of routine work, but education and training systems have hardly responded. Thus most people have few opportunities to acquire new forms of creativity and social competences that they need to combine with technical skills, in order to remain employable. The resulting “polarization of work” – a hollowing out of the middle segment of the income distribution – is accompanied by a polarization of economic empowerment. As machines take over more cognitively predictable work, this sense of disempowerment is felt by skilled “knowledge workers” higher up the skill distribution. And as machines improve their sensory-motor abilities (sensing their environments and responding accordingly), the sense of disempowerment among the low-skilled workers intensifies. In the presence of this flexible dispersion of production activities across countries and the free movement of financial capital, governments became increasingly ill-equipped to provide the economic and social security that citizens had come to expect. However, most politicians continued to make their usual promises of material prosperity and security. The widening gap Economics Discussion Paper (2017–91)—submitted to Global Solutions Papers 5 between political promises and their fulfillment led to rising citizen distrust of their governments, alongside a growing sense of political disempowerment.2 The recent symptoms of the decoupling of social from economic progress could be found in the many telltale signs noted in the introduction: public discontent with globalization (even among those whose living standards were thereby improved), unwillingness to accept refugees (even when these refugees were expected to generate more net gains for their hosts), rising nationalism, as well as growing ethnic and religious conflicts. The Brexit vote, often motivated by the wish “to take back control” (even if the decision led to economic losses) and the public resonance with Trump’s “American first” call (even among those whose jobs were not offshored), as well as the protests regularly surrounding the G20 summits, were further evidence of decoupling. Many politicians – still wedded to the liberal worldview – were blindsided by these developments. They interpreted them solely as grievance against rising inequality. They were confirmed in this narrow perspective by much of the economics profession, which remained focused exclusively on people’s material needs. The only issues relevant for economic policy, according to this view, were “the size and distribution of the economic pie.” Free-market activities, in the absence of externalities, led to economic efficiency – that is, the maximal size of the economic pie – but this pie might be inequitably distributed. Governments could redistribute this pie, but generally at the cost of economic efficiency. This was the well-known “equity-efficiency tradeoff.” In this intellectual context, it was not surprising that economists overwhelmingly interpreted the growing social discord in the West as the outcome of rising inequality. Thomas Piketty’s book, Capital in the Twenty-First Century, which focused on inequality of wealth and income in Europe and the United States since the 18th century, became an acclaimed international bestseller. Many other books in the same vein followed. There can be no doubt that rising inequality played a significant role in creating the growing dissatisfaction in the Western middle classes. Median household incomes in many countries had stagnated while aggregate income continues to grow. But this was far from the whole story. After all, human wellbeing springs from many sources that are unrelated, or at best tangentially related, to economic success: a sense of personal and social achievement; engagement with the world around us through intrinsically meaningful activities that develop our capacities; tolerance and respect for oneself and others; a sense of social belonging; and the opportunity to promote the happiness and relieve the suffering of others. In time when social prosperity is coupled to economic prosperity, economic success promotes the achievement of these other sources of wellbeing. But once decoupling occurs, it is possible for people living in material affluence (by historical standards) to be justifiably miserable. After all, man does not live by bread alone. _________________________ 2 Some driving forces behind past, present, and expected future decouplings of social and economic progress are surveyed in the Vision Brief: Dennis Snower, “The Dangerous Decoupling,” G20 Insights, Overarching Visions (http://www.g20-insights.org/policy_briefs/the-dangerous-decoupling/). Economics Discussion Paper (2017–91)—submitted to Global Solutions Papers 6 This is what politicians missed, namely, that public discontent was also arising not just from inequality but, profoundly and independently, from a sense of disempowerment and social estrangement. Neither phenomenon is closely related to inequality or other measures of economic performance. Disempowerment and estrangement, as distinguished from inequality, can help us understand the widespread popular appeal of the resurgent nationalisms and populisms. When significant segments of Western voters feel that they are losing control over their lives, they will respond with enthusiasm to politicians who promise to “take back control” and “make America great again.” Those who are worried by the disintegration of their traditional communities and workplaces will feel attracted to a political program that promises to “bring our jobs back home,” “keep immigrants out” and restrict access “extreme vetting” of refugees from Muslim countries. The existence of inequality with or across Western countries cannot account for the popularity of these policies. After all, these policies don’t provide hope of reducing these inequalities, but they do promise to reduce disempowerment and estrangement. Disempowerment – a sense that one’s own exertions are not sufficient to ensure one’s prosperity, security and fulfillment; a sense of being unable to control one’s fate and the concomitant absence of a stake in the economic system – arises not merely from relatively low income and wealth, but from a belief, objective or subjective, that one is at the mercy of forces beyond one’s control. Redistribution of income and wealth can reduce inequality, but it may exacerbate disempowerment if it reduces incentives to find jobs and acquire skills. That is the problem inherent in passive labor market policies, such as unemployment benefits. It is also the problem with guaranteed basic income, which may provide some economic security, but does not address the problems of disempowerment and estrangement. People living in countries with dispersed income distributions may nevertheless feel empowered, provided that social mobility is sufficiently high. Estrangement – a sense that the communities from which one gains one’s identity are falling apart – is not merely a matter of inequality either. People who are estranged from their peers – in their workplace, neighborhood, or country – do not automatically become socially integrated through a rise in their incomes. Estrangement is a fundamentally social, not economic, problem. The estranged are all those people who fear that the social fabric of their communities is being undermined through a variety of dislocations: job dislocations associated with global supply chain adjustments, migrants who feel ostracized in their host countries, host citizens who feel alienated from and threatened by migrants, and cultural and religious groups who feel that their identities are called into question through changes in their social environment. Nor are disempowerment and estrangement merely about deficient income mobility. Income mobility is about the chances that the poor become rich and vice versa. By contrast, disempowerment and estrangement reflect a declining stake in the economic system and in society. This stake cannot necessarily be restored through improved income prospects. There have been many societies around the world with little economic and social mobility, but nevertheless a strong sense of common destiny. Mobility can be improved through social services and reverse discrimination, but these are no guarantee for a common stake in the social and economic systems. Economics Discussion Paper (2017–91)—submitted to Global Solutions Papers 7 Disempowerment and estrangement are often interrelated. Disempowerment includes a loss of the sense of achievement, lack of access to meaningful activities and frequently disrespect for oneself, often closely related to intolerance and disrespect for others. A loss of social achievement is not only disempowering, but is also socially estranging. The common perception, in developed and developing countries, that politicians are disconnected from the concerns of their voters has a grain of truth. Most politicians have been focused on economic policies that address economic performance, while the voters are suffering from social ills that economic performance alone cannot overcome. The decoupling of economic and social progress may also help explain why so many people in both developed and developing countries are engaged in the intense pursuit of material things, even though this does not lead to major, enduring improvement in their life satisfaction and leaves depression, burnout, and suicide rates largely unaffected. Like their political leaders, the public is also focused on economic performance, largely unaware of its neglected social needs. The decoupling of social and economic progress has important implications for global governance. Let us explore what it means for the appropriate goals of the G20. What are the appropriate goals of the G20? The G20 has been constructed to be flexible in its responses to global problems: unlike other international organizations, its mandate is not rigidly defined; it lacks a secretariat with rigid departments; its member states are sufficiently small in number to make collective leadership possible, while being sufficiently influential to cover two-thirds of the world’s population and 80 percent of its trade; the G20 provides face-to-face contact among national leaders, in order to promote trust for collective action in response to problems as they arise; the issues on the agenda can be addressed through ministers’ meetings and expert groups, constituted flexibly; it gives voice to a variety of non-state actors through its Engagement Groups (B20, L20, T20, and so on). In these respects, the G20 is unlike any other organization of global governance. It can set its own agenda. The G20 Presidency rotates from one country to another annually and each Presidency sets its own priorities.3 In short, the G20 is flexible enough in its agenda, large enough in terms of economic clout, small enough for effective decision-making, strong enough in terms of professional expertise in order to choose its goal freely. Given its characteristics above, the legitimacy of the G20 ultimately depends on its ability to promote global social welfare. As long as economic and social progress is closely coupled, it is appropriate for the G20 to focus primarily on economic issues. But once decoupling has occurred, it becomes necessary for the G20 to devote itself also to other aspects of social wellbeing. A simple way of understanding the evolution of the G20 agenda is to view it as a response to successive challenges. In the aftermath of the crisis of 2008, the G20 focused on economic _________________________ 3 See A. Narlikar, „Can the G20 Save Globalization?“ G20 Insights, Overarching Visions (http://www.g20- insights.org/policy_briefs/can-g20-save- globalisation/). Economics Discussion Paper (2017–91)—submitted to Global Solutions Papers 8 growth and stability – the traditional economic issues, covering aggregate material “prosperity” (P for short). In response to problems of inequality – including diverse forms of inequality of opportunity – it became clear that the G20 could no longer afford to focus merely on aggregate economic outcomes, but also needed to give attention to the distribution of incomes. Thus the G20 agenda broadened to become “inclusive prosperity” (IP). In response to diverse environmental threats, the G20 could no longer afford to focus just on current inclusive prosperity, but also had to take account of how our economic activities are affecting our natural capital and thereby the ecological sustainability of our economic plans. Thus the G20 agenda broadened further to become to inclusive, sustainable prosperity (ISP). Under the current German G20 Presidency, it became clear that the G20 needs to interpret sustainability more broadly – to involve fiscal, monetary, social sustainability as well – and needs move away from simple crisis management towards creating resilience of the world economy to economic, political, social and environmental shocks. Accordingly, the G20 agenda broadened even further to become “resilient, inclusive, sustainable prosperity” (RISP). These aspects are all included in Germany’s G20 priorities, “building resilience, improving sustainability and assuming responsibility.” The broadening G20 policy agenda may be seen as an implicit acknowledgement that economic progress is no longer closely linked to social progress. The 2030 Agenda and its Sustainable Development Goals is a first step towards designing policies that address more than the purely material needs. To make further headway, policy makers will need to address this broader spectrum of human needs systematically and explicitly. What human needs should be addressed? Though universal human needs have been classified in a variety of ways, the analysis above suggests that the following trilogy of needs may be particularly appropriate in addressing the problems of deficient growth and inequality, disempowerment and estrangement. This classification may be summarized by the acronym “WES”: • W stands for material “wealth,” satisfying people’s material needs. This covers the traditional realm of goods and services, the traditional focus of economic policy making. It centers on GDP-related measures, as well as security from adverse shocks to income, health, and employment, addressed by traditional social and welfare services. • E is for “empowerment,” which includes the satisfaction of people’s need for achievement. This may involve mastery of the environment, personal growth, attaining personal goals and creativity. • S is for “solidarity,” covering the needs of humans as social creatures. In terms of motivation psychology, it covers both care (compassionate concern, altruism) and affiliation. In terms of social psychology, sociology and anthropology, it covers identity formation, the establishment of social norms and values, and the development of common narratives that promote an understanding of the social environment, motivate social action, and make social assignments.