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Roula Khalaf, editor of the FT, picks her favorite stories in this weekly newsletter.
The writer, associate editor of the FT, is chief executive of the Royal Society of Arts and former chief economist of the Bank of England
A century ago, people like me — macroeconomists — did not exist. Neither is macroeconomics itself as a discipline. It took the turmoil of the stock market crash of 1929 and the Great Depression of the 1930s to usher in an intellectual and political revolution: national accounts (a statistical basis for measuring the economy), macroeconomic theory (a conceptual basis for understanding the economy), and monetary and fiscal policy frameworks (in order to helped the economy prevent future unrest).
A century later, echoing the words of Milton Friedman in the 1960s, we are all macroeconomists now – armchair or otherwise. Small movements in GDP and inflation dominate the public discourse. Taxation and government spending shape political and public debate. However, the greatest danger we face today is not a repeat of the Great Crash or Great Depression (although neither is impossible). Rather, it is an extension of the “great divide” that has emerged within and between societies over the past half century.
We see these divisions at the geopolitical level in the increasing number of wars, both real and trade-related, and the arms race in defense spending and tariffs. We see these divisions nationally, with a divided and polarized electorate engaged in fractious and polarizing elections this year. And we see these divisions at the local level as well, in the growing discontent and insecurity felt in many communities – something the recent riots in the UK and Ireland have illustrated all too clearly.
At first glance, these divisions are difficult to explain. There has never been a time in history when the cat’s cradle of human connections, global and local, has been more intertwined. Flows of goods, services, information, finance and people are at or near historic highs. However, our networks have rarely been more sensitive. What explains this paradox?
Harvard political scientist Robert Putnam gave a convincing explanation at the turn of the millennium Bowling Sam. Putnam identified the loss social capital — erosion of social networks of trust and relationships, and attrition social fabricwithin and between communities — as a culprit. He has forensically documented the weakening of this social glue in the US since World War II and the ways in which communities have come apart.
Putnam’s recent documentary, Join or die?, shows that these patterns have worsened during this century – and not only in OUR. The disintegration of the social fabric has become the international norm. Research has shown how big and long-term the costs of bowling are. From weak growth to slowing social mobility, from the loneliness epidemic to the breakdown of communities, the erosion of social capital goes a long way in explaining some of our greatest scourges.
At the national level, cross-country evidence points to a strong, causal relationship between social capital and growth, even after taking into account the other “capitals” that economists tend to focus on (human, physical and infrastructural). And the effects are great. An increase in confidence of 10 percentage points raises the relative economic performance of the economy by 1.3-1.5 percent of GDP. If the UK can achieve Scandinavian levels of confidence, it could add £100 billion a year to our growth.
One key mechanism through which social capital fosters growth is by unlocking opportunities. Recent research by Harvard economist Raj Chetty and colleagues suggests that social connectedness may be the most important single determinant of social mobility. Providing a poor (usually unconnected) child with the network of a rich (connected) child increases their lifetime income prospects by 20 percent, according to Chetty’s estimates. Few, if any, policy interventions, educational or otherwise, produce such high lifetime returns.
These effects are equally large and persistent for non-financial measures of health. Centuries of research in the US tells us that the best indicator of someone’s longevity and happiness is the quality of their relationships, or social capital. As noted by US Surgeon General Vivek Murthy, bowling alone is equivalent to smoking 15 cigarettes a day, which shortens life expectancy and impairs mental health and well-being.
What is true for individuals and nations is also true for communities. For the poorest, security and solidarity are at the top of the population’s hierarchy of needs, Maslow-style. Social cohesion and connectedness are known to reduce crime and anti-social behavior and build pride of place and belonging. This is why social capital is a key foundation for creating successful places. Without it, they atrophy or, worse, rebel.
The depletion of social capital is important in another key dimension — government effectiveness. The legitimacy and effectiveness of government requires public trust. This is currently lacking. This year’s Nobel Prize winners in economics, Daron Acemoglu, James Robinson and Simon Johnson, have shown that unreliable, extractive institutions can often be so inefficient that nations fail.
Almost a century ago, the Great Depression was an explosion that quickly heralded a revolution in economic policy. Today’s Great Divide is a slow breakthrough, which has been quietly undermining us for more than half a century. The malignant neglect of social capital has sown the seeds of many of today’s biggest problems, economic, social and spatial. Reversing course will require a major leap in policy and practice as occurred a century ago. My next column will be about this new model of capitalism.
