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Capitalism, & Democracy

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Citation Friedman, Benjamin M. 2007. , economic growth & democracy. Daedalus 136(3): 46-55.

Published Version http://dx.doi.org/10.1162/daed.2007.136.3.46

Citable link http://nrs.harvard.edu/urn-3:HUL.InstRepos:4481500

Terms of Use This article was downloaded from Harvard University’s DASH repository, and is made available under the terms and conditions applicable to Other Posted Material, as set forth at http:// nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of- use#LAA Benjamin M. Friedman

Capitalism, economic growth & democracy

Two parallel developments in world of these developments has been univer- affairs that dominated the latter years sal, traditional Communist societies of the twentieth century, each of which committed to both one-party political gained momentum with the disintegra- systems and centrally planned econo- tion of the Soviet Union a decade and a mies have suddenly become a rare spe- half ago, have continued into the new cies, limited to isolated sightings like era. In politics, many of what had been Cuba and . one-party Communist states gave way Especially at the time of the Soviet col- to multiparty electoral democracies, in lapse, many observers in the West sim- most cases with signi½cantly expanded ply assumed that the rejection of Com- political rights and civil for munism reflected an eagerness to em- their citizens. Thirty years ago, only for- brace both Western politics and Western ty countries were politically ‘free’ by . Russia and most of the other conventional Western standards; today former Soviet republics quickly adopted there are ninety.1 At the same time, what many aspects of Western modes in both had been centrally planned and directed dimensions, as did the former Soviet ‘command’ systems for organizing eco- dependencies in Eastern Europe. But it nomic activity and distributing the re- soon became apparent that imitation of sulting product made room for a sharply Western ways was not the sole, nor al- increased role for private initiative, in- ways even the primary, motivation. On cluding private ownership of assets and the positive side, the mere desire for in- accumulation of . While neither dependence, and on the negative, old- fashioned nationalism, turned out to be Benjamin M. Friedman is William Joseph Maier important drivers as well–sometimes, Professor of Political at Harvard Uni- as in the former Yugoslavia, with disas- versity. His publications include “Day of Reckon- trous consequences. ing: The Consequences of American under Reagan and After” (1988) and 1 Data are from Freedom House, a private non- “The Moral Consequences of Economic Growth” pro½t research institute. The increase from (2005). forty ‘free’ countries in 1975 to ninety in 2007 modestly overstates the extent of the change, © 2007 by the American Academy of Arts in that the total number of countries rated in- & Sciences creased from 158 to 193 over these years.

46 Dædalus Summer 2007 Moreover, Western-style economics Even within the Western world, how- Capitalism, economic and Western-style politics do not always ever–where electoral democracy and a growth & go together. Russia, for example, has pri- -oriented economy are mostly democracy vatized large parts of what was once a taken for granted–parallel movement tightly controlled economy steered by does not automatically imply a causal Gosplan under successive ½ve-year plans linkage. Do the two necessarily go to- adopted at the highest levels of the Sovi- gether? And if so, what is the causal et state. And since 1991 Russia has con- mechanism? ducted several rounds of elections, for the national duma as well as for the pres- Half a century ago, the open question ident of the republic, that were substan- was whether central planning or a de- tially open and genuinely contested. centralized private market could better But President Putin’s government now deliver ef½cient production of goods seems to be cementing its grip on pow- and services, investment in new capital er in many forms, and prospects for the resources, and gains over time in pro- future of democracy in Russia remain ductivity and therefore, ultimately, in uncertain–especially since Putin’s re- a population’s standard of living. Rich- election in 2004. ard Nixon’s famous ‘kitchen debate’ China presents an even larger ques- with Nikita Khrushchev, in 1959, attract- tion. Beginning with Deng Xiaoping’s ed so much interest at the time not just reforms in 1978, China has moved stead- on account of the surrounding theat- ily away from central planning toward rics but because the question about private economic initiative. Even within which they were arguing was genuine- the economy’s industrial sector, where ly under dispute. Americans’ memories state-owned enterprises were once dom- of the 1930s were still strong; Soviet liv- inant, the share of production still car- ing standards were reportedly improv- ried out under direct or ing rapidly; and the Soviets had only control has shrunk to 42 percent. Most recently demonstrated their scienti½c citizens are now free to decide where to prowess by launching the Sputnik satel- work, whether to start a , and lite into orbit around the Earth. Later, whom to hire. Private wealth accumula- when Khrushchev said that the Soviet tion, including ownership of productive Union would ‘bury’ the , assets as well as residential , is he was not threatening nuclear (as not just allowed but encouraged. many at the time misinterpreted him to But at the national level the Chinese imply) but predicting that the Soviets, government remains a one-party dicta- with their superior , torship; and there is little publicly ex- would eventually overwhelm the West pressed interest in multiparty politics, economically and therefore politically. broader freedom of expression, or oth- Khrushchev was wrong. And as more er elements of Western-style democra- and more people living under Commu- cy. Whether a country with one-½fth of nism came to realize the error of that the world’s population and (soon) the prediction, change ensued in fairly short world’s second-largest economy can sus- order. Mao’s China gave way to Deng’s tain the combination of market-oriented not as a matter of ideological preference economics and nondemocratic politics –quite the contrary–but because Chi- is one of the most signi½cant open ques- nese citizens did not want to live in pov- tions in world affairs today. erty forever and China’s rulers feared the

Dædalus Summer 2007 47 BenjaminM. consequences of forcing them to do so. But the important fact remains that, Friedman on Similarly, a key trigger of the demise of ever since the , de- capitalism the Soviet Union and its empire was that centralized market have had & democ- enough people there and in Eastern Eu- a proven record of delivering rising liv- racy rope–importantly including practical- ing standards over sustained periods of ly all of the nomenklatura–eventually time. Asking whether a understood that, notwithstanding the and democracy go together is therefore of½cial propaganda, they were falling tantamount to asking whether economic ever farther behind Western living growth and democracy go together. And standards. In 1990 the average Soviet thinking of the matter in that way sug- living standard was only one-third that gests a mechanism by which the connec- of the United States, even after allow- tion between the two might indeed be ing for differences in the cost of living. causal. The comparable ratio for Poland ver- sus (West) Germany was one-eighth. The experience of many countries sug- Perhaps ironically, an even more dra- gests that when a society experiences matic demonstration of the superior ef- rising standards of living, broadly dis- fectiveness of market-oriented econom- tributed across the population at large, ic systems is Korea. At the time of its it is also likely to make along partition, at the end of World War II, a variety of dimensions that are either what became was the poor- part of the very de½nition of democracy er, more agricultural part of the Korean or closely associated with democracy. peninsula; most of the industry was in These include not just open, contested the north. Incomes and living standards elections to determine who controls the were meager to negligible by Western levers of political power but also politi- standards. Today the South Korean stan- cal rights and civil liberties more gener- dard of living is more than half that of ally; openness of opportunity for eco- the United States, modestly ahead of nomic and social advancement; toler- ’s, and more than twice Rus- ance toward recognizably distinct ra- sia’s. South Koreans enjoy levels of life cial, religious, or ethnic groups within expectancy, nutrition, and com- the society, including immigrants if parable to Americans’ (and the South the country regularly receives in-migra- Korean child mortality rate is lower). tion; and a sense of fairness in the pro- North Korea, by contrast, remains a vision made for those in the society who, desperately poor country where people whether on account of limited opportu- regularly starve in signi½cant numbers, nities, lesser human endowments, or malnutrition is widespread, and those even just poor luck in the labor market, who can manage to do so sneak across fall too far below the prevailing public the border into China in search of either standard of material well-being. handouts or surreptitious work at sub- Conversely, experience also suggests sistence wages. Whether these contrasts that when a society is either stagnating will eventually arrest the attention of the economically or, worse yet, suffering a North Korean public, and the country’s pervasive decline in living standards, political leadership, in a way comparable it is not only likely to make little if any to what happened in China, the Soviet progress in these social, political, and Union, and Eastern Europe is an inter- (in the eighteenth-century sense) mor- esting subject for speculation. al dimensions, but all too often it will

48 Dædalus Summer 2007 undergo a period of rigidi½cation and But this propensity toward a relative Capitalism, economic retrenchment, sometimes with cata- rather than an absolute perspective can growth & strophic consequences. also explain why market economies, as democracy The key to why so many societies be- long as they deliver rising living stan- have in this way is that most people eval- dards to most of a society’s population, uate their living standards not in abso- lead more often than not to democracy lute but relative terms. Further, sub- and many of the other features of a dem- stantial evidence points to two distinct ocratic society. If people derive satisfac- benchmarks by which people judge tion both from living better than they how well off they are: Most people are have in the past and from living better pleased when they are able to live better than people around them–and, impor- than they, or their families, have lived in tantly, if these two sources of satisfac- the past. And they are pleased when they tion are at least partially substitutes for are able to live better than their friends, one another–then when people are in neighbors, coworkers, and others with fact living better than they have in the whom they compare themselves. past (and have con½dence that their liv- The pervasive tendency for people ing standard will continue to improve in to evaluate their economic situation the future) they will attach less urgency by these relative, rather than absolute, to the desire also to live better than oth- benchmarks explains a variety of eco- ers around them. Hence the economical- nomic and psychological behaviors that ly self-protective instinct that underlies otherwise would be puzzling. For exam- so much of what emerges as intolerant, ple, within any one country, at any giv- antidemocratic, and ungenerous behav- en time, people with higher incomes are ior–racial and religious discrimination, systematically happier than those with antipathy toward immigrants, lack of lower incomes, but there is no corre- generosity toward the poor–naturally sponding increase over time in how hap- takes a back seat to other priorities when py people are on average even though the economy is delivering sustained average incomes may be steadily increas- growth with broadly distributed increas- ing. As observed long ago, es in living standards. “All men, sooner or later, accommodate A salient implication of this key role themselves to whatever becomes their played by rising living standards (as permanent situation,” so that “between opposed to merely a country’s average one permanent situation and another income level) is that many countries there [is], with regard to real happiness, throughout the developing world prob- no essential difference.” Smith went on, ably will not have to wait until they “In every permanent situation, where reach Western levels of per-capita in- there is no expectation of change, the come before they begin to liberalize so- mind of every man . . . returns to its nat- cially and democratize politically. Here ural state of tranquillity. In , again, South Korea is an instructive ex- after a certain time, it falls back to that ample. Over roughly a quarter century, state; in adversity, after a certain time, beginning within a decade of the con- it rises up to it.”2 clusion of the Korean War, South Korea achieved a remarkable record of eco- nomic growth that took the country’s 2 Adam Smith, The Theory of Moral Sentiments per-capita income from an extremely (Oxford: Oxford University Press, 1976), 149. low level to better than what one-fourth

Dædalus Summer 2007 49 BenjaminM. of Americans then enjoyed and better mics should not reclaim the essential Friedman than what one-third of the richer coun- human optimism that was its intellec- on capitalism tries in Western Europe had. And, over tual birthright. & democ- a similar period, but following some- racy what behind, South Korea evolved from The connection between rising living a one-party military dictatorship under standards and either social attitudes or and his successors into political institutions is not limited to a reasonably well-functioning electoral low-income countries, or to the mere democracy, with most of the usual dem- establishment of new electoral institu- ocratic freedoms. tions. In America, for example, eras in Over the past quarter century China which economic expansion has deliv- has maintained the fastest advance in ered ongoing material bene½ts to the per-capita income observed anywhere majority of the country’s population in the world: on average, 7 percent per have mostly corresponded to eras when annum in real value. These economic opportunities and freedoms have broad- gains have been highly uneven, especial- ened, political institutions have become ly between the country’s urban/com- more democratic, and the treatment mercial minority and the rural/agricul- of society’s unfortunates has become tural majority, but it is clear nonetheless more generous. But when incomes have that the bulk of the country’s population stagnated or declined, reaction and re- has enjoyed a signi½cant improvement treat have been the order of the day. (A in living standards. If the improvement major exception was the 1930s, when in living standards for the majority of the Depression instead led to a signi½- the population is the circumstance un- cant opening of American society and der which a society normally makes strengthening of American democracy, progress on social and political dimen- perhaps because the economic distress sions as well, then it is likely that over was so severe and so widespread that time China, too, will evolve in the direc- the sense of being in the same sinking tion of democracy if the country is able ship together overwhelmed the more to maintain its current rate of economic competitive instincts that usually pre- advance. vail when people realize they are not If this conclusion seems optimistic, getting ahead.) that is because it is. The notion of a caus- Attitudes toward immigrants are a al connection between advances in ma- useful case in point: The United States terial well-being and in the social/polit- experienced a wave of anti-immigrant ical/moral character of a society stems in the 1850s, which largely dis- from an Enlightenment tradition that appeared during the robust industrial from its origins was grounded in, and expansion after the Civil War. The long drew strength from, a robustly optimis- agricultural depression of the 1880s and tic perspective on the human enterprise. 1890s saw a return of extremely ugly Economics, which originally grew out anti-immigrant agitation and prejudice. of this same tradition, took a different That movement gave way, after the turn course during the nineteenth century of the twentieth century when econom- and became the ‘dismal science.’ But by ic growth returned, to a period in which now experience has solidly discon½rmed the mood of the country was to welcome the fears of Malthus and Mill (and Marx, –in the language of the time, to ‘Ameri- too), and there is no reason why econo- canize’–large numbers of immigrants.

50 Dædalus Summer 2007 But the pair of economic downturns that and under what circumstances–the his- Capitalism, economic followed World War I then led to the torical record likewise makes clear that growth & highly restrictive and plainly discrimina- democracy more often advances when democracy tory Emergency Quota Act of 1921 and living standards are advancing, too. One National Origins Act of 1924. (The ½rst can only speculate what American de- half of the 1920s was also when the Ku mocracy would look like today if, per- Klux Klan achieved its greatest influence haps as a reaction to the Depression, the in American society and politics, and country had abandoned its largely mar- not just in the South, or only in rural ket-oriented economic system in favor areas, but also in states like Michigan of Soviet-style central planning, and the and Pennsylvania and in like Chi- fourfold increase in per-capita income cago and Indianapolis.) that has taken place (compared to the Wholesale immigration reform fol- pre-Depression peak) had not occurred. lowed only in 1965, in the middle of the America is not the only long-estab- longest sustained economic expansion lished Western democracy where a con- in U.S. history. As incomes stagnated in nection between rising living standards the late 1980s and early 1990s, however, and the strengthening of democratic a backlash developed, which included freedoms is evident. In Britain the open- such manifestations as Proposition 187 ing of the universities, the civil service, in California and efforts in states like and other areas of society to non-An- Florida and Texas to deny public bene½ts glicans in the 1870s; the institution of even to legal immigrants. But with the many forms of basic economic protec- strong economic expansion of the mid- tion in the 1940s, as recommended by to-late 1990s, the issue disappeared to the wartime Beveridge Report; and the such an extent that the one candidate reform of British race relations in the who chose to run for president in 2000 1960s all occurred during times of robust on an explicitly anti-immigrant platform economic expansion and widely shared (Pat Buchanan) attracted so few votes, improvement in living standards. In even in the Republican primaries, that France the same was true for the broad he had to change parties. Today, follow- reforms in civil liberties, in electoral in- ing the return of stagnating incomes stitutions, and in during the since 2000, immigration is again a high- early years of the Third Republic, and ly contentious issue. for the parallel set of reforms introduced It would be foolish to pretend that by de Gaulle after World War II. In Ger- every twist in this century and a half of many the legal and judicial reforms that American attitudes and policies toward followed the uni½cation of the German immigrants was narrowly or determinis- empire in 1871, the creation of the Fed- tically driven by the simple difference eral Republic as a postwar democratic between improving and stagnating liv- state, and Willy Brandt’s dramatic chal- ing standards. But it would be even more lenge to “dare more democracy” like- foolish to pretend that the underlying wise all occurred in the context of ro- ebb and flow of economic prosperity bust, sustained, widely shared increases and stagnation had nothing to do with in incomes. what happened. And on other issues as Conversely, many of the horrifying well, such as race relations, religious tol- antidemocratic phenomena that so eration, generosity to the poor–in addi- marred Europe’s twentieth-century tion to such basics as who gets to vote history ensued in a setting of pervasive

Dædalus Summer 2007 51 BenjaminM. economic stagnation or decline. Hitler’s parallel notion that these features of so- Friedman rise to power in the wake of economic ciety enhance the ability of any econo- on capitalism and political chaos under the Weimar my, but especially one based primarily & democ- Republic is a familiar story, but it is on private initiative and decentralized racy worth recalling that as late as 1928 the markets, to achieve superior perform- Nazi Party drew only 2.8 percent of the ance over time. At the most basic level, vote in German national elections. What it is obvious that either formal or infor- made the difference, soon thereafter, mal restrictions barring half of the pop- was the onset of the Depression, which ulation from certain jobs because they affected Germany more than any other are of the ‘wrong’ sex, and one-sixth of European country. Similarly, France’s the remainder because their skin is the Vichy regime, which willingly collabo- ‘wrong’ color, interfere with a society’s rated with the authorities in German- ability to make the most ef½cient use of occupied areas of the country (France its labor resources. Failing to educate was one of only two European countries, and train large numbers of children in along with Bulgaria, to turn Jews over a way that adequately equips them for to the Nazis from territory the Germans postindustrial , in most did not occupy), emerged out of a pro- cases simply because their parents have tracted period of French economic stag- failed to earn middle-class incomes, pre- nation. sents a similar impediment. In these other countries as well, one Other elements of what democracy can easily point to signi½cant historical normally entails may also plausibly en- events that contradict the tendency for hance an economy’s ability to thrive social and political progress to follow and to grow, although in many cases nei- economic progress (though probably ther the argument nor the evidence is none so obvious, or so important, as the straightforward. Dictatorships may or 1930s in America). Bismarck’s pioneer- may not be benevolent, while electoral ing introduction of social insurance in democracies likewise often exhibit their Germany in the 1880s, the Asquith re- own forms of corruption and cronyism forms in Britain before World War I, and –especially when, as in practically all the ambitious agenda of the Matignon democratic countries today, the govern- Accords in France in the 1930s are all ment plays a signi½cant role in regulat- noticeable counterexamples. But what ing economic activity. Wasted resources is at issue here is not the laws of physics, and unproductive investment interfere which are plausibly true ‘everywhere with economic ef½ciency and constrain and always,’ but rather the kind of pre- economic growth regardless of whether dominant tendency that signi½es rela- the favored party is a dictator’s relative tionships that emerge in the study of or a campaign contributor to a political human behavior, both at the individu- party. al level and especially in the aggregate. Not surprisingly, –who are Viewed through that lens, the historical normally more interested in explaining record is clear enough. economic phenomena than in exploring their consequences–have devoted sub- Such relationships, of course, need not stantial effort to investigating the role of be one-sided. The idea that rising living different political institutions, and dif- standards foster democratic freedoms ferent legal frameworks, in and institutions need not preclude the for why some countries enjoy more eco-

52 Dædalus Summer 2007 nomic success than others. Leaving aside ample, are clearly essential to any eco- Capitalism, economic the obvious exceptions, like China and nomic system based on markets and on growth & countries where income from oil exports private initiative and incentive. On the democracy has risen rapidly at times of tight world available evidence, these institutions energy markets, there is some tendency also appear–perhaps for just that rea- for electoral democracies to perform son–to be signi½cant contributors to better economically, although even with economic growth. Hence at least some these exceptions excluded the relation- elements of what is normally meant by ship is hardly close. Indeed, some evi- democracy are not just consequences of dence suggests that while moving from rising living standards but also key pre- minimal civil liberties and political conditions to the form of economic or- rights to something more like the world ganization that makes sustained increas- average is helpful in this regard, ‘too es in living standards possible. much’ democracy exerts a negative in- fluence on an economy’s growth (per- Free markets are not without their limi- haps because of more redistributive - tations, of course, and prominent among ation, or excessive litigation and regula- them in the context of democracy and its tion). Even more so than electoral insti- broader implications is the absence of tutions per se, the evidence indicates any moral principle governing the distri- that effective ‘,’ especially the bution of what the economy produces. protection of rights, matters Until fairly recently, most economists, for economic growth. following the thinking of Simon Kuznets As a result, societies may ½nd them- half a century ago, believed that while selves stuck in either a virtuous circle in incomes would become more unequal which economic growth and democratic for some time in the early stages of a freedoms mutually reinforce one anoth- country’s economic development, in due er or, less fortunately, a vicious circle in course that process would reverse and a which the stagnation of living standards narrowing of inequality would accom- blunts any movement toward democrat- pany further increases in the average in- ic reform while adverse political institu- come. The more recent record has belied tions and the absence of basic freedoms this theory. Income inequality in Amer- retard economic improvement for most ica, for example, has been increasing citizens. Leaving aside the episodic char- again since the late 1960s. The share of acter of market-driven economic growth the nation’s income accruing to the top in most Western societies, the long-term ½fth of all households has risen from experience of countries like the United 42.6 percent in 1968 to 50.4 percent in States is a rough example of the former. 2005 (the latest data available), while the The current plight of many countries in share received by each of the other four sub-Saharan presents even sharp- ½fths has correspondingly fallen. Most er examples of the latter. other industrialized countries have had But in either case, the relationships similar experiences. at work also bear on the more funda- To be sure, there is no lack of plausi- mental question of how market-orient- ble explanations for this phenomenon, ed economic and democ- some of them consistent with the ideas racy are connected. The rule of law underlying Kuznets’s original thinking. and protection of the rights of credi- Most economists agree that the prima- tors and other property-holders, for ex- ry force widening the distribution of in-

Dædalus Summer 2007 53 BenjaminM. comes in recent decades has been a tech- to enter the labor force is primarily the Friedman nological revolution that has sharply in- responsibility of the , the on capitalism creased the demand for some kinds of government likewise can respond to the & democ- skills while reducing the demand for incentive to impart those skills that the racy others. As a result, workers who happen labor market now values more highly. to have those newly scarce skills (com- Over time, therefore, the widening of puter programming, for example, or fa- inequality brought on by technologi- cility with certain forms of organization- cal revolutions in countries that are far al ) have been able to com- along the path of economic develop- mand high premiums in the labor mar- ment is also likely to turn around. ket, while those whose skills are in les- But this process may be a lengthy one, ser demand (more basic industrial disci- as the experience of the United States plines, or even brute-force manpower) and other industrialized countries in have seen their wages decline and jobs recent decades suggests, and along the become harder to ½nd. The difference way the wider inequality remains a fact from what Kuznets thought is that in- with which the society must deal. If the stead of occurring just once, at the be- overall growth rate is suf½cient, as it has ginning of a country’s economic devel- been in China, incomes may become opment, this kind of massive shift in the sharply more unequal and yet most citi- demand for different kinds of skills in zens will enjoy improving living stan- the workforce can recur whenever an dards. But when aggregate growth is economy undergoes a technological rev- more modest, as is likely to be the case olution. As a result, the distribution of where the economy is already highly incomes need not simply widen once industrialized, a suf½cient widening in and then contract inde½nitely thereaf- the distribution of incomes means that ter, but rather can undergo repeated epi- many if not most citizens will fail to en- sodes of widening inequality depending joy an improvement in their living stan- on the course of technological innova- dards. tion. The implications, from the perspec- Importantly, however, Kuznets and tive of what connects market-oriented other economic historians (most promi- economies to democratic societies, are nently Jeffrey Williamson) posited that sobering. If part of what matters for tol- the subsequent narrowing of inequali- erance and fairness and opportunity, ties, once the technological basis of pro- not to mention the strength of a soci- duction has stabilized, is also the result ety’s democratic political institutions, of systematic economic forces. On the is that the broad cross-section of the demand side, larger wage premiums population has a con½dent sense of get- for workers with certain skills lead busi- ting ahead economically, then no socie- ness to innovate in yet further ways, so ty–no matter how rich it becomes or as to economize on the use of what has how well-formed its institutions may be now become high-wage labor. At the –is immune from seeing its basic dem- same time, the larger wage premiums ocratic values at risk whenever the ma- give workers an increased incentive to jority of its citizens lose their sense of acquire the skills that are scarce, there- economic progress. by introducing a supply response as Since the widening of the American well. And since in most countries the income distribution began in the late education of young people who are yet 1960s, and especially since the onset

54 Dædalus Summer 2007 of the economic pressures that ½rst able interlude in the mid-to-late 1990s, Capitalism, opec economic emerged when the cartel quadru- what is happening now is mostly a con- growth & pled oil in 1973, overall economic tinuation of patterns that have been in democracy growth in the United States has failed to place for the past three decades. If these offset the effect of ever-wider inequali- trends persist, many of the social and ties in retarding the economic advance political pathologies that have emerged of most Americans. Between 1973 and in the past, both here and elsewhere, are 1993 the economy’s average growth rate, likely to reappear. after correcting for rising prices, was 2.8 As the Kuznets-Williamson line of percent per annum. After allowing also thinking suggests, all this may well turn for population growth, the increase in around once the pace of technological per-capita income averaged 1.7 percent. slows. The larger question But because so much of the fruits of that is whether that slowing in the adoption economic growth went to a fairly small of new technology (more speci½cally, in group at the top, the increase in the me- the demands that new technology places dian income–that is, the income of the on the skill base of the workforce) will family just at the middle of the country’s occur. What if the characteristic feature income distribution–averaged only 0.3 of economic production and organiza- percent. tion in the postindustrial age turns out With faster overall growth, and some to be an accelerated pace of ongoing slowing in the widening of the income technological change? Would the dy- distribution, the median American fam- namic responses governing the supply ily income rose at a much healthier pace of economic skills, including responses during the remainder of the 1990s: on to individual incentives as well as poli- average, 2.3 percent per annum faster cies implemented by government, be than inflation. Since then, however, able to keep up? These questions loom the patterns of the prior two decades as the greatest uncertainties threatening have again been dominant. From 2000 the link between the market-oriented through 2006, the economy overall ex- economy and political democracy in the panded on average at 2.5 percent per an- years ahead. num. But at least through 2005 (again, the latest data available), the median family income has declined, compared to inflation, by 0.5 percent per annum. Indeed, the median family income has declined, in real terms, in four of the past ½ve years. Five years is not a very long time from the perspective of basic influences on human behavior, and therefore on the advance or retreat of democratic society. But on the current trajectory of modest overall growth and widening inequality, the stagnation of incomes for a signi½- cant proportion of American families may plausibly continue for some years to come. Further, except for a more favor-

Dædalus Summer 2007 55