#117: The Moral Causes And Consequences Of Economic Growth – Benjamin M. Friedman

42 min read
#117: The Moral Causes And Consequences Of Economic Growth – Benjamin M. Friedman

Benjamin M. Friedman is widely recognised as one of the world’s leading macroeconomists. He is currently the William Joseph Maier Professor of Political Economy, and formerly Chairman of the Department of Economics, at Harvard University. His books include The Moral Consequences of Economic Growth and Religion and the Rise of Capitalism.

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JOE WALKER: Ben Friedman, welcome to the podcast.

BENJAMIN FRIEDMAN: Thank you. Delighted to be with you.

WALKER: Ben, this is a real treat for me. You write the kind of books that I love. First, they’re about big questions. Second, they are interdisciplinary. And third, they are full of fascinating footnotes. The Moral Consequences of Economic Growth, which was first published in 2005, is one of my favorite books of all time. So when I heard that the author had a new book coming out, which is titled Religion and the Rise of Capitalism and will be published on the 26th of January (which is Australia Day), I thought, “I have to speak with him.” And Ben, if it’s okay with you, I’d like to touch on both books in this conversation. But before we do that, I’d like to ask you about your background. You were originally interested in law, but then found economics. What prompted that change?

FRIEDMAN: When I was an undergraduate at Harvard, I thought that I would wind up going into law. I was very fortunate when I was a senior, my last year at Harvard, I won a fellowship to spend several years studying at the other Cambridge, Cambridge, England, where incidentally, for the first time I had the pleasure of meeting lots of Australians. We didn’t have many at Harvard, but they certainly did at Cambridge. Lots of my friends there were Australian and that was a treat for me.

FRIEDMAN: But in the course of my several years at Cambridge, I had to study something. So I continued on with economics and the longer I went on with it, the more I realized that what I wanted to do was continue with economics and do that for a career rather than go into law. So when I came back to the United States after my fellowship ended, instead of going to law school as I had originally planned, I came back and went to the Harvard Economics Department.

WALKER: You taught Tyler Cowen, who has been a guest on this podcast, PhD macro in 1984. Do you have any memories of Tyler as a student?

FRIEDMAN: Not particularly. Our department for better or worse is very vertically-oriented. So I’m a macroeconomist and I interact very heavily with the students who are going into macroeconomics. But then there’s labor economics, there’s international economics, there’s economic theory — all of the various fields of economics. Tyler was interested in game theory at that time and so he worked primarily with my colleague, Tom Schelling, later a winner of the Nobel Prize in our subject. And I did teach Tyler because in those days, I was teaching a segment of the required first-year course in macroeconomic theory.

All of our first-year students have to take a full year of microeconomic theory and a full year of macroeconomic theory. And each of those sequences is divided up into four pieces with four different faculty members doing the teaching. In those days and for quite a few years after, I was teaching one of the four segments of the required macroeconomic course for the first year students. And of course, Tyler was in it. So I met him, but I only taught him for six weeks and I didn’t get to know him well. I’ve subsequently had interactions with him, which have been a lot of fun. I like him. He’s a very creative thinker.

WALKER: Indeed. And that six weeks must have been impactful because Tyler has said that you were one of his favorite teachers at Harvard. Which aspect of teaching itself is hardest to teach?

FRIEDMAN: What aspect of teaching is hardest? I think the part that I have found the most difficult over the years is explaining to students ideas that I think are false. In order to render our students well-educated, we have to tell them what the menu of ideas is in the discipline, and my part of economics, macroeconomics, is more than most I think subject to controversy. And unlike some departments, we don’t just tell people what we think about one side of a controversy. We feel that in order to prepare them to go on to their professional work, we need to tell them what both or in some cases all sides of the controversy are.

So I think what I found hardest over the years was doing justice to ideas that I just didn’t believe in. There was a friend of mine now unfortunately no longer living who used to put it this way. He always said, “I can teach that the earth is round and I can teach that the earth is flat, but when it comes to the flat part, my heart just isn’t in it.” Well, I have the same feeling sometimes.

WALKER: Which macroeconomic concept do you feel that most for?

FRIEDMAN: A major part of macroeconomics within the last generation has been a view of the world characterized by frictionless markets, perfect information, complete rationality on the part of all of the players in the economy. And I think every one of those characteristics that I just indicated is wrong. And moreover, this is then compounded in much of macroeconomics by a further assumption which is that all of the individuals in the economy are identical.

Now, the idea that all of the individuals are identical makes possible certain analytical constructs, which are of course very convenient for economists to work with, but for somebody like me who’s interested in, for example, monetary policy and debt markets, this is deadly, I think, because think of it this way, Joe: if you and I were identical in every way, economically, why would you ever lend to me and why would I ever borrow from you? In a world of identical people, there would be no private debt markets.

But a lot of my work in earlier years was precisely on how the bond market works, how one person borrows and another person lends. Well, this is just one example that right in my face all the time in my work is the fact that people aren’t identical. So if you put together: the frictionless markets (it never costs anybody anything to do anything), the perfect rationality (everybody thinks things through correctly), the foresight everybody can understand what’s happening in the future, and the fact that everybody is identical … this adds up to a kind of macroeconomics that I just don’t have a lot of faith in. But when I teach macroeconomics I feel obliged, alas, to tell students about it and so I do. But as my friend said, my heart isn’t in it.

WALKER: You were born in Kentucky, if I’m not mistaken.

FRIEDMAN: Yes, that’s correct. I am from Kentucky.

WALKER: And you grew up there, correct?

FRIEDMAN: I lived in Kentucky up until the age of 18 when I went off to Harvard as an undergraduate.

WALKER: And Kentucky is one of the states hardest hit by the deaths of despair phenomenon. Can you tell me what it was like growing up there and what it’s like today socially and economically, if you ever get a chance to make it back?

FRIEDMAN: Well, I’ll duck what it’s like today because I do go back from time to time, but I haven’t lived there for a very long time. So I think listening to me on what it’s like today would not be very helpful. I was far away from the communities that are at the deaths of despair phenomenon. I lived in Louisville, which is not the capital city of the state but the largest city. When I was growing up there, it was a city of maybe half to three quarters of a million people. Today, it’s probably more like a million people. Standard of living was pretty high. I lived in an affluent suburb of the city. The deaths of despair phenomenon occurs, alas, in rural parts of the state, coal country parts of the state. There’s an area called Hardin County, often the Appalachian region of Kentucky that used to be … I wouldn’t say prosperous, but at least people had the coal mines to work in and they had a few other things to do.

Today, the coal mines are largely shut or on the way to shutting. Those are very difficult areas. They’re characterized by people who don’t have a lot of education. In the suburb in which I grew up, most people had a college education. Most of the people with whom I went to high school went on to college of one form or another. So I knew about and occasionally would see something of these coal mining and other rural areas. But you shouldn’t think that I grew up there.

WALKER: As I said, Ben, your first book is superb and we won’t rehash the whole book here on this podcast, because it was published a while ago and you have a new book out now. But I encourage people to read it, The Moral Consequences of Economic Growth. And if it’s okay with you, Ben, I would like to jump around just a few issues like lily pads because I think that The Moral Consequences of Economic Growth, while it was published a while ago now, is more relevant than ever.

FRIEDMAN: If I may interrupt, you’re not the only person who seems to think that, Joe. This is the first time I’ve ever had a book that’s been out that long in which the sales keep rising. I think the reason, and this is very unfortunate, I’m sorry to say this, but especially in the context of the events of the last week or two, lots of people have thought that my 2005 book explained why we were going to get a Donald Trump and what the consequences of getting a Donald Trump would be. And not that I want to personify this to Trump, but I think he has become for better or worse the metaphor for a whole wide-ranging phenomenon describing the attitudes not just of hundreds of thousands, but of millions, tens of millions, of people in the United States.

It is true, I think, that some of the things I talked about in my 2005 book explain why the Trumpism phenomenon would emerge as a result of the period economically that we’ve been through. And I’m sorry that that’s the case, but people do seem to think the book is relevant in that way. And as I say, alas, the sales are going up.

WALKER: Let me quote from the book. In the book you write,

“I believe that the rising intolerance and incivility, and the eroding generosity and openness, that have marked important aspects of American society in the recent past have been in significant part, a consequence of the stagnation of American middle class living standards during much of the last quarter of the 20th century. If the United States can return to the rapid and more broadly-based growth that the country experienced during the first few decades after World War II — or more recently the latter half of the 1990s — over time these unfortunate political and social trends will continue to abate. If our growth falters however, or if we merely continue with slower growth that benefits only a minority of our citizens, the deterioration of American society will, I fear, worsen once more.”

FRIEDMAN: You hit it right on the head. And, alas, the possible trajectory that I indicated third, namely the one of continuing slow growth and continuing widening inequality so that the fruits of that additional growth would accrue only to people who by and large were already at the top, that’s the trajectory the United States has continued on in the 15 years since I wrote that book.

So we’re now about 30-odd years into an experience of complete stagnation for the middle class of American society and of course, as you point out by talking about these Appalachian Kentuckians, worse than stagnation: outright decline for many Americans. The point of the book was that good things, non-economically, happen to societies when they experience economic growth that’s widely shared. And when societies either don’t have growth or have growth that’s enjoyed only by a few, then good things don’t happen and a lot of times bad things happen.

WALKER: As we saw with the recent storming of the Capitol, the veneer of civilization is very thin indeed. There’s an ominous quote in the book which makes a similar point, a quote by Alexander Gerschenkron.

FRIEDMAN: Yes, yes. That’s the one that everybody quotes. You can go ahead and read it. It’s about a democracy without democrats. I assume that’s the one you have in mind.

WALKER: Exactly. “Even a long democratic history does not necessarily immunize a country from becoming a democracy without democrats.”

FRIEDMAN: Alas, yes so. Importantly, for your listeners who don’t have the benefit of the book, when Alex talked about a democracy without democrats, there’s a small D on democrats. He’s not referring to the Democratic Party, he’s referring to democrats in the sense of adherents of small D, democracy.

WALKER: In the book, you define growth, for your purposes, as rising living standards that are widely shared. But your argument in supportive growth is subtle. It’s not about the benefits growth delivers. In other words, it’s not about levels of incomes. Rather it’s about growth per se. In other words, it’s about changes in incomes. People need to feel a sense of forward progress. Kind of like a cyclist who has to keep pedaling or he’ll topple over, or a shark which must keep swimming or it will die, a harmonious society has to keep growing sustainably or it will descend into conflict and violence.

I want to get to the crux of the argument of the book. The crucial question is: why is it the case that when people feel they’re doing better compared to some reference point, whether that reference point is in their own past or in their parents’ past, do they consequently feel less need to get ahead compared to other people in the society? Because at first glance, this seems highly counterintuitive. From the point of view of sexual selection, what really matters is relative status. So why are relative success and growth per se, substitutes rather than complements? Is it just a cognitive bias? Is it just Albert Hirschman’s Tunnel Effect that as people see others in their society moving forward, they’re provisionally okay with that insofar as they believe that it is an economy-wide change and that their turn will come soon? What’s going on here?

FRIEDMAN: I don’t explain it in the book, Joe. I framed the question exactly as you’ve indicated. To step back a moment, we have an overwhelming amount of evidence that people do assess their material well-being in relative terms, not absolutely. If you go up to a friend and say, “How are you doing, Mike?” Mike is likely to look back at you and say, “Well, compared to what?” That’s just the way human beings think about the issue. And the two benchmarks that we have a lot of evidence to indicate that people use are, one, their own past experience and two, how are they doing compared to other people.

And in both cases, it’s really very interesting and I spend some amount of space in the book talking about it, exactly how you define this matter of one’s own prior experience and how you define who everybody else is. So to start with who everybody else is, is that simply the friends in your bowling league? Is that everybody in your office? Is that everybody who lives on your block? There’s been a lot of economic work on that, and the usual finding is that people compare themselves more locally rather than globally.

Most Americans don’t get a lot of satisfaction from saying, “You know, I really live a lot better than those people in India.” That’s just not the way people people think. Conversely, we have lots of different ways to think about how people assess their own prior experience. I quite deliberately frame my ideas about this in an intergenerational way. I picture people asking them questions depending on their stage of the life process like, “If I’m just starting out in life, what are the opportunities available to me compared to what my uncles had?”

A little further along, “How am I raising my children compared to what I remember growing up in my parents house?” A little further along, “How’s my career doing compared to how my father or my mother did?” So I put a long time frame on it. Now, with all that as background, we’re now at your question, which I’m really not able to answer. These two sources of life satisfaction — doing better compared to how I or my family have done in the past and doing better than other people, — these could be compliments or they could be substitutes. And here I have no argument for why they turn out to be substitutes, but the book contains lots of empirical historical examples.

I look at the history of the United States since our Civil War in the 1860s. I look at the history of Britain since the Napoleonic wars. I look at France since the founding of the Third Republic in 1870. I look at Germany since the unification of the empire in, I believe, 1861. And again and again and again, the evidence seems to comport with the substitutes idea, not the compliments idea. But it’s absolutely true that I don’t present a theoretical argument. I hope somebody will come up with one one day, but I didn’t have one.

WALKER: In 1974, the economist and historian, Richard Easterlin argued that economic growth in Japan has not made people’s lives better by their own reports. He then extended the finding to a number of countries including the United States. And as you know, Ben, his claim became known as the Easterlin Paradox, which suggests that there is no link between a society’s economic development and its average level of happiness.

But then in 2008, three years after your book was published, Betsey Stevenson and Justin Wolfers revisited the paradox and found no evidence of a satiation point beyond which wealthier countries could have no further increases in subjective well-being. In other words, economic growth continues to deliver happiness. On which side of the debate do you fall?

FRIEDMAN: Both and for a reason that I think is very clear and technological. But first, since you did not engage in well-deserved chauvinism, I’ll do it for you. Justin Wolfers is Australian. He was our student at Harvard. He’s a wonderful man. I taught him because he did go into macroeconomics. I know him very well. Justin is absolutely Australian. Moreover, you’ll get the picture. His first child is a daughter named, Matilda. So Justin is as as Australian as they come.

Now, why do I believe both? There was a technological development called television. And back when Richard Easterlin was looking doing his work and even more so when the data were collected for Easterlin’s work … Easterlin did his work in the 1970s, but the data that he was using were collected in the 1960s, actually, at the beginning of the ’60s … there wasn’t much television then.

So if you were a person living in, let’s say, Lisbon or living someplace in Portugal — and I picked Portugal because, at that time, Portugal was one of the lowest income of the original European 15 countries — if you were living in Portugal in 1960, the odds were pretty good that the people you compared yourself to were other Portuguese. Or to take another country that was pretty far down the scale for Europe at that time, Greece, if you were living in Greece, you probably compared yourself to other Greeks.

Well, come forward nearly 50 years to when Betsey Stevenson and Justin Wolfers were doing their work. By now, everybody has television. And so if you are living in Portugal, you know what life is like in the United States, to pick a country that has a higher income than Portugal. You know what life looks like in India, to pick a country with income a lot lower than Portugal.

So for reasons that are very consistent with this relative income idea, relative consumption idea, that Richard Easterlin outlined in his work in the ’70s, today everybody in the world is comparing themselves, to a certain extent at least, to everybody else in the world, and therefore on average Portuguese are a lot happier than people in India, but they’re not as happy as people in the United States. But there’s a reason why I think, Easterlin was right in the ’70s and why Justin and Betsey are right today.

WALKER: Got it. So the facts have changed.

FRIEDMAN: I mean as so often happens in economics, technology changes and those changes are very important. And you’ve hit on a perfectly good example.

WALKER: Two quotations, Ben, and then a question. First quotation: in a 1991 article titled ‘The Allocation of Talent: Implications for Growth‘, Kevin Murphy, Andrei Shleifer and Robert Vishny find that, “In most countries, rent-seeking rewards talent more than entrepreneurship does, leading to stagnation. Our evidence shows that countries with a higher proportion of engineering college majors grow faster, whereas countries with a higher proportion of law concentrators grow more slowly.”

Second quotation: in their book, Deaths of Despair and the Future of Capitalism, Anne Case and Angus Deaton write, “With lower growth, there is more pressure to shut out less successful groups altogether. Lower growth sharpens the fight over resources, it gives each group incentives to lobby to get more than its share, and it poisons politics, much of which is concerned with the division of resources. Since 1970, growth has predominantly gone to those who are already better off, who are much better equipped to defend their share. When people feel they must protect their economic position in a tougher world, they divert their time and their resources to the zero-sum game of distribution and away from the positive-sum game of innovation and growth. Rent-seeking replaces creation, and we can get into a vicious circle that impoverishes everyone.”

Is rent-seeking better thought of as a cause or a consequence of lower growth — or is it both?

FRIEDMAN: I would certainly think it’s a cause of slower growth. My own argument in my book The Moral Consequences of Economic Growth is certainly consistent with the idea that slow growth creates rent-seeking, but that’s not an argument that I made directly. The consequences that I was after in that book were … and I used the word moral in a self-consciously 18th century way … were consequences for the public character of the society. To return to the beginning of our conversation, to what extent do we have a commitment to democracy and democratic institutions?

To what extent do we want to make opportunities available to everybody rather than just the sons and daughters and nieces and nephews of the people who are already at the top? How about generosity toward people who, for one reason or another, were not able to take advantages of the opportunities that are available? How about tolerance? Tolerance with respect to what as an American? I would immediately think of race relations, but also I have in mind things like ethnic tensions and religious prejudice.

These are all the dimensions of behavioral consequences of growth versus no growth that I looked at in the book. Now, I would be sympathetic if either my colleague Andrei Shleifer or somebody else were to come along with a theory and perhaps some evidence saying that in addition to these moral public consequences I documented, slow growth or no growth also leads to an increase in rent-seeking behavior. But that’s not something I’ve shown in my book.

WALKER: In thinking about the moral consequences of economic stagnation and regression, may I augment the mechanism in your thesis and then get your reaction?


WALKER: So recently I’ve been reading a lot of work by Peter Turchin and Jack Goldstone, who are fathers of the field of cliodynamics. Clio after the Greek muse of history; dynamics: changes over time. And they look for big patterns and non-linear dynamics in history. It’s not a deterministic theory. It’s not a cyclical view of history, but it is what they call structural-demographic theory. And indeed in 2010, Turchin had what’s now a very famous article in Nature where he in some sense predicted the political instability that the United States has unfortunately been experiencing recently.

And in Turchin’s theory, Ben, popular immiseration plays second fiddle to what he calls “elite overproduction” in generating political instability. Because one of the consequences of inequality is an increase in the economic elite. There are now more millionaires and billionaires in the United States than ever before and people who are economically very successful also then have political ambitions, so they want to join the political elite. But much of the seats of political power have inelastic supply.

So there can only be one president, so many senators, members of congress, judges, et cetera. So when elite overproduction happens, intra-elite competition intensifies and that, in Turchin’s view, is one of the main causes of political instability. And then of course if to the extent popular immiseration exists, elites are able to enlist popular support, as are counter-elites, of which Donald Trump and Steve Bannon would be now classic examples.

The reason that in Turchin’s view, and I might not be paraphrasing it perfectly, but the reason that elite overproduction seems to be more important than popular immiseration in generating political instability is just that the elites have the power. So to the extent that popular immiseration exists, it can always be quashed and repressed through military and economic might in the hands of the elite.

And I thought it was interesting in in your book, The Moral Consequences of Economic Growth, where you talk about the the French Revolution, and I’ll quote a final paragraph from the book, on page 96. So you write, “Especially when incomes overall are stagnant, the opportunity for some to get ahead, also often creates intense resentment of those who do. Edmund Burke, defending the pre-revolutionary regime in France as a form of ‘open aristocracy’ analogous to England’s, hailed ‘the ease with which a commoner could obtain a title by securing one of the official posts that automatically ennobled their holders.’ By contrast, Tocqueville argued that ‘Far from reducing the dislike of the nobility by their inferiors, the practice of ennobling commoners had the opposite effect. The envy with which the newly made nobleman inspired his former equals, intensified their sense of being unfairly treated.’ According to Tocqueville, the result which is thoroughly familiar in the modern context as well, was ‘more animosity towards the recent creations than towards the old nobility.'”

But I guess my question would be, who is doing the envying here? And it seems that the people who are doing the envying aren’t so much the commoners, to use the language that would have been used in the time of the French Revolution, but the nobles or the aspirants to nobility. And in that context of elite overproduction, intra-elite competition intensifies. So I guess in very broad terms, the story of political instability resulting from inequality is more a story of elites than of popular revolutions. Your reaction to that.

FRIEDMAN: Let me begin by saying I’m not familiar with the work so I’m reacting to your description of it. The notion that economic outcomes would, in certain circumstances lead to increased competition among the elites, as you describe it, for what Fred Hirsch would have called positional goods — only one president, only 435 members of congress — that sounds exactly right to me. The one addition I would make, however, is that there’s a lot of room at least in our system for people who would like to play in that arena to find themselves influential.

So to take an obvious example, Charles Koch, the billionaire, is probably one of the most influential political figures in the United States. To my knowledge, he has never displayed any interest whatsoever in running for elective office. Now, we can say Charles Koch is an extreme example being a multi-billionaire, but lots of people as you point out have enough money in the United States that they are able to make contributions to political campaigns and to political parties at a level that brings some influence with with it.

And unfortunately in a very regrettable Supreme Court decision some years ago, in the so-called Citizens United case, the courts determined that corporations are allowed to play in this game as well. So we have a very “money buys everything” system in the United States now. Now, fortunately, the voters don’t always go along and there are quite dramatic cases. I’m thinking of a governor’s race in California a few years ago where some multi-billionaire decided that she would like to become governor of California, and out of her own fortune put an enormous amount of money into the race, and the voters said, “Thank you very much. We’ll just have the other candidate. You can go home.”

So it isn’t always determinative, but the role of money in our politics gives people the opportunity to compete in a way that you describe without having to think they have to be one of the 435 congressmen. So that part, I think, rings true. What I would have to see worked out is why this leads to political instability. It might lead to policies we don’t like. It might lead to firms in some industries being able to do the equivalent of bribing congressmen through political contributions to put features in the tax law there that we don’t like or prevent their competition from abroad, from bringing cheaper goods into the US. Lots of bad policies can ensue. I can see that quickly. But why this would lead to political instability isn’t clear to me.

WALKER: I think perhaps because the stakes are so high, relative status is important, conspicuous consumption starts to ratchet up and elite competition intensifies.

FRIEDMAN: One useful example to pick, Joe, would be to look at the experience in the latter part of the 19th century, our so-called Gilded Age. As I’m sure you’re aware, that’s the period that the economist Thorstein Veblen was looking at and trying to explain in his works which coined the phrase “conspicuous consumption.” So we certainly had that kind of competition, not so much in the political sphere, but conspicuous consumption, people putting on evermore lavish entertainments.

This was the period of Mrs. Astor and The New York Four Hundred and all that. But the question then is whether it led to political instability. And I’m not aware that it did. There was of course a lot of political competition within each party. Different people wanted to be president. There was competition between the two parties. We already by then had the Democrats and the Republicans. But I don’t see that there was anything unstable about the situation. So the 1880s, 1890s, on into the new century, might well be an interesting test case for that hypothesis.

WALKER: If the goal of The Moral Consequences of Economic Growth was to persuade people that economic growth also has moral benefits not just moral costs, how would you rate the book’s success?

FRIEDMAN: I think it’s had some modest success. I’m pleased that the book is frequently mentioned in the context of answering just the question that I set out to answer. The question that I had in mind was a very America- or Australia- or Europe-centered question. It was: why is it that we who live at a living standard that’s so much greater than our grandparents did and their grandparents before them, and also we who live at a living standard that’s so much greater than the other two-thirds of the world, why should we care about further economic growth?

I think I provided a pretty good answer to that question and I’m pleased to see that in discussions of why growth matters, the book is frequently cited and the book’s emphasis on the implications of growth for these non-material characteristics of the society get mentioned. So I’m pleased about that. Now, one could have said that a higher standard of success would have been that our policy makers, at least in the United States, might have said, “Well, if growth is really that important and growth has to be inclusive for those beneficial effects to ensue, we better adopt policies that would make sure that the inequality stops widening and the fruits of further growth actually accrue to the broad cross-section of the American population.” And the last of that hasn’t happened. So if that’s the standard, then the book didn’t have an effect.

WALKER: On its face, Religion and the Rise of Capitalism, your new book, is deliciously counter-intuitive because if modern economics grew out of the Enlightenment and the Enlightenment represents a departure from religion, then what has religion got to do with anything? So what role has religion played in economics and capitalism?

FRIEDMAN: I think it has been very important and in ways that cut against the grain of the standard interpretation that you just articulated very well. The standard view is that economics was a product of the Enlightenment, which is true and the Enlightenment was, we think, a movement away from viewing the world as a God-centered universe, toward what we today think of as we would call it secular humanism, and that’s also true I suppose. And therefore people assume, by putting the two together, that the creation of modern economics by people like Adam Smith and David Hume and Adam Ferguson and all of the other greats of that period must have had nothing to do with religion.

I claim that’s false. This is meant to be a fundamental rethinking of where our economics came from and the story is that Smith and Hume, and their contemporaries lived at a time when religion was more central and more important than anything we know or really can imagine in today’s western world, and therefore they were constantly in the middle of religious controversies, whether they wanted to be or not.

And that “whether they wanted to be or not” is very important for this argument because we know historically that Smith and Hume, and many of those other people, were not religiously committed individuals. This is not a case of religious believers self-consciously bringing their beliefs to bear on their professional work. What is it? It’s a matter of what’s in the air. It’s a matter of what you hear discussed at the lunch table every day. It’s what controversies are swirling all around you.

Another feature of their world is that intellectual life was much more integrated then. When Smith was a professor at the University in Glasgow, there were only 16 members of the faculty who had the title of Professor. He was one but there was a professor of theology, there was a professor of church history. These folks interacted with each other all the time. Smith and Hume were both members of what we would call today a lunch discussion club, the most intellectually prestigious one in Edinburgh. And of the 30 odd original members of that club, five were Church of Scotland clergymen.

So these people were constantly exposed to what was new and interesting and controversial in the religious thinking of the day, whether they wanted to be or not. And — and here’s the crux of the argument — exactly at the time when Smith and Hume were reaching young adulthood and going on to do their professional work that led us to the economics we have today, the religious ideas of the English-speaking protestant world were undergoing a fundamental transition and that transition was to a new form of thinking that I think was remarkably congruent with Smithian economics, which is our economics, and that in effect enabled Smith’s thinking.

It opened the way for him to see this remarkable capacity of humans to take beneficial actions when they did so in the right circumstances, which of course, he understood to be competitive markets. So that in a nutshell is why even though the argument may seem counterintuitive, I think is true.

WALKER: So what were some of the religious controversies swirling around Smith and Hume?

FRIEDMAN: In brief, it was a movement away from predestinarian Calvinism and the three most crucial pieces of that transition were, one, the movement away from a belief in what Calvin called “utter depravity”, the idea that humans were unable to see and to do any good in their lives — movement from that to a much more benign optimistic view of the human character, which I characterize by looking at John Locke, one of the great figures of the Enlightenment but also a religious person. And Locke’s metaphor was the candle of the Lord, that humans were born with access to the candle of the Lord.

And if they would just use the candle that was given to them, they would see the way to do right. The second piece was the movement away from Calvin’s view of predestination. Calvin thought that whether any individual person was to be saved in the afterlife or condemned to an eternity of punishment in hell was something that the individual had no control over whatsoever. This was again, pre-destined, meaning that the decision for any individual was made before that person was even born. Indeed long before that, before the world was even created.

So the idea that people could make choices, take actions to influence their spiritual destiny, was completely ruled out. And by analogy, if people can’t affect that, well maybe they can’t affect other things as well. And by contrast, in the period in which Hume and Smith were growing up, the view was coming to be “No, no, predestination isn’t right”. To use the phrase of the first archbishop of Canterbury who was appointed by William and Mary after the glorious revolution, “People are able to cooperate.”

That was his word, cooperate with the divine in effecting their salvation. Well, translated into the worldly realm, this creates a whole different view of human agency. People are able to make choices and take actions that will in the end, make themselves and other people better off as well. That’s the analogy. And then the third piece of it was from the Calvin view that man’s sole purpose of being here on Earth is glorification of God to the post-Calvin view that part of the reason we’re here is that the divinely intended purpose for us is to enjoy and be happy in our existence.

And in some renderings, that’s the principle reason we’re here. And therefore if you believe that the principal reason we’re here is to enjoy existence, then it’s not surprising that the world would be structured, and humans would have capacity, that would enable them to make themselves happy and you could even extend that to the market economy. Why did markets evolve over history? Well, maybe because the Divine wanted to have a mechanism available to allow humans through their own choices and actions to make not only themselves but other people better off as well.

And then the great contribution, to repeat, that Adam Smith made was to recognize that the mechanism in all this is competition carried out in markets. So I think there is this congruity, there is this creating the right atmosphere, this opening up and enabling of a kind of view of human agency, human choice, human action that I wouldn’t say would have been impossible — this is not a necessary argument — but it would have been a lot harder to think in this way back when everybody thought in terms of predestinarian Calvinism. And therefore if the question we have is why did modern economics come along when it did and in the form in which it did, I think this has a lot to do with it.

WALKER: There’s still one important ingredient missing from Smith’s view of the beneficial consequences of self-interested behavior, and that is ongoing technical progress, as you write in the book. So talk about how the United States arrived on the scene in the early 19th century and what that added to the picture?

FRIEDMAN: Well, to begin, you’re absolutely right. Any reader of the book will I hope understand that I came away from this research as an enormous admirer of Adam Smith’s thinking. Whether I would have liked him as an individual, I have no idea. We don’t know that much about his persona. But as a thinker, I came away with great admiration and indeed, I’ll tell you, Joe, that when my editor at Knopf suggested that we use the photograph … Not a photograph, that’s wrong. Use the standard painting, whatever it is, of Adam Smith as the frontis piece of the book, absolutely, I said yes.

So when you open the book, what you’ll see is the very first thing you come across is a full page portrait of Smith. So I’m a great proponent of Smith. Having said that, Adam Smith absolutely did not understand the idea of ongoing technical progress. My interpretation is that he lived too early. You could say that he lived right in the middle of the industrial revolution and therefore at least the beginning of the first industrial revolution. And therefore maybe he should have seen it, but he didn’t and there’s no evidence in any of his writings that I can see that he saw the possibility of ongoing technical progress.

If you want a smoking gun for that argument, it’s the famous use of the pin factory example. Smith thought that increases in the standard of living came from increased division of labor, what we would today call specialization in production. And right at the beginning of The Wealth of Nations is this lovely example in which he talks about how they make pins in a factory.

Incidentally, in case your listeners don’t know, he isn’t talking about hap pins or safety pins. Pin was the 18th century word for what we call a nail of the kind that you would use to build houses. So he’s talking about house nails. It’s a very practical thing. If he had any remote idea what was going on and why the technology of the Industrial Revolution would be important in the way in which it proved to be, he wouldn’t have picked a pin factory, he would have picked something having to do with a textile factory because that was the center of gravity of the Industrial Revolution.

So in short, Smith missed it. Now, come forward. By the time we get to half a century later, call it the 1830s, especially in the United States, the role of ongoing technological progress was absolutely unmistakable. Even in Smith’s day, people understood that they were living better than their grandparents had lived. That he did not miss, but people then thought of it as some kind of an upswing of what they would have called a long wave in the economy.

We wouldn’t call it a business cycle, but a long wave. But by the 1820s, especially the 1830s, people knew that there wasn’t just a long wave, they knew that they were living in a long-term upward trend in material living standards. It was especially evident in the United States and therefore it’s no surprise that the person who, as far as I can find, first introduced the concept of long-term technical progress into economics was Francis Wayland. Francis Wayland was a Baptist minister. Here we do have somebody who’s a religious believer.

Francis Wayland was a baptist minister. He was the president of Brown University, Baptist Foundation. But more to the point for our purposes, Wayland wrote the best-selling economics textbook in the United States before our civil war, wrote it in 1837. And the book has an unmistakable statement of the role of ongoing technical progress. You cannot miss it. And Wayland interprets it as divine benevolence. So there you have it. And of course if Smith had lived into the 1830s, I have no doubt he would have understood it too, but he didn’t. He died in 1790. His great book was published in 1776. He had some revisions, but he never revised that part.

WALKER: There’s some evidence to say that Smith’s favorite book of his was The Theory of Moral Sentiments not The Wealth of Nations. Which of those two books do you prefer?

FRIEDMAN: I like both books. I’m an economist and so I’ll go with The Wealth of Nations. Remember, Smith never thought of himself as an economist. Indeed, the word didn’t exist then. Smith was a professor of moral philosophy and his first book which he published in 1759 when he was only 36 years old, his first book was called The Theory of Moral Sentiments. It’s a book on philosophy. So maybe he liked that one better. I don’t know.

There is a view which I talk about in my new book, which I think is correct that he was put up to the economics aspect of it by Hume. Hume was very clear in his writing that he thought the great project to be done in their era would be to create a science of man that would be comparable to what Newton had done 75 years earlier for the physical world. And many people think that Hume, who was Smith’s mentor, he was a dozen years later, he was Smith’s closest friend, but many people think that Hume put him up to the assignment and said, “Hey, why don’t you go look at the economy. That would be a place to start in creating our science of man.” Well, maybe that’s true, but regardless of whether Smith preferred The Wealth of Nations, I’m an economist and so that’s the one I’ll pick. But I like the other one too.

WALKER: You mentioned Francis Wayland. Let me quote from his The Elements of Political Economy, which was written just a few years after Tocqueville’s visit to America. So Wayland writes, “To relieve the sick, the destitute, and the helpless is a religious duty and therefore should, like every other religious duty, be a voluntary service.”

How did religion affect Americans’ views of the role of government?

FRIEDMAN: There was a great debate on this in the latter part of the 19th century. Wayland died right around the time of the Civil War, but by the time we got to the 1880s, the 1890s — exactly the period you and I were talking about a few minutes ago for the Thorstein Veblen phenomenon, the conspicuous consumption — people were understanding that the growth of the economy was not … as John Kennedy once said, this was not a tide that was lifting all of the boats.

Lots of people were being left behind. In I believe it was 1879, Henry George wrote his famous book called Progress and Poverty. Earlier people wouldn’t have thought to put those two nouns together in a book title. They would say, “If you’re going to have progress, you’re not going to have poverty.” By the time, you got to the 1880s-1890s, people understood that, “No, that wasn’t right. You can have progress with a lot of poverty.”

So a new movement then emerged within the American Protestant churches called The Social Gospel Movement in which people understood that broad parts of the population were not getting to share in this prosperity, and they thought there was a role for the government to do something about it and, further, they thought there was a role for the churches to steer, to advise, the government in doing this.

They understood that they and the churches had no ability to make this happen in part because they understood that the voluntarist aspect of religious giving and sharing that Wayland had emphasized just wasn’t adequate to the task. So their view was that government needed to step in to correct the distributional problem, but they saw themselves in the mainline Protestant churches as playing a key role in steering these policies.

WALKER: I’ve always been fascinated by the contrast between America and Australia in that regard. So Australia’s religious origins are much more Catholic than Protestant, Ben. And I wonder if that has sort of cast a long shadow over us socially in the form of the lesser entrepreneurship in Australia than you would see in America as well as the belief in government in Australia and the much stronger social safety net we have here.

We have grown up with first relying on the top-down provisions and authority from the Catholic church and then that slowly grew into the same faith and expectation in big government. Of course, I’m completely speculating here. But it is an interesting distinction between the two countries.

FRIEDMAN: Well, let me not make any pretense whatsoever of being able to talk about Australia because not only have I not lived there, I very much regret to say I have never visited Australia. It’s one of the great failings of my life, I think, that I’ve never been there. I’m serious. I’ve always wanted to visit Australia. Going back, I mentioned before that when I was a student at what we call the other Cambridge, I had all these Australian friends and they were such wonderful people and I’ve always wanted to go visit and I’ve never done it. So maybe someday I will.

You may be right, but let me give you a slightly different view and that is the Tocqueville view in Democracy in America. Tocqueville visited America in the 1830s, the period we were just talking about in the context of Wayland. And Tocqueville wrote this two-volume book after he returned to his native France. And one of the things that he remarked on in the book as part of America’s democratic character was the role of private, as we would call them, “voluntary”, as he called it, associations.

He explicitly compared it both with England, which he knew and also with France where he came from. And there’s this wonderful passage in Democracy in America and he said that for just the kind of endeavors in which in England you would see some great lord being the sponsor, and in France, you would see the government as the sponsor. In the United States it’s some private voluntary association created bottom up.

He was very taken with, again this, not his word, mine, bottom-up character of American society. So I wonder if part of what you’re picking up in your comparison of Australia, which I don’t know and America which I do is not so much the Roman Catholic Church phenomenon, but in this case maybe the Tocqueville phenomenon. I don’t know. But if you were speculating, I’ve now speculated too, but at least on the basis of Tocqueville.

WALKER: I think you’re absolutely right. In American Grace, Bob Putnam observes that Americans choose their religion based on their politics. Why are Americans so weird like that?

FRIEDMAN: I don’t know. I happen to agree with Putnam. Now incidentally, he’s making a limited statement. He’s not talking about Mormons. He’s not talking about Roman Catholics. He’s not talking about Jews. He’s talking about Protestants. Most Americans are Protestant of some form or other. So what he’s talking about is the choice of do I want to be an Episcopalian? Do I want to be a Presbyterian? Do I want to be in the Disciples of Christ? That sort of decision.

Now, I suppose the answer … and here, I’m again speculating because while some of the fact base that I’m drawing on is in my new book, the question you raise isn’t .. I would speculate that across the different Protestant denominations in the United States, the underlying theology is not sufficiently different to make people super uncomfortable in one versus another.

Now, I say that and I know there will be people who will step up and say, “Well, look, I’m a Missouri Synod Lutheran and how can you tell me that my theology is not different from the Episcopalians?” Well, of course, I understand things like that, but you’re asking a broad question and so I’m trying to give a broad answer. By and large, the underlying theology in most of these Protestant denominations is non-predestinarian. Even the Presbyterian church these days is not really Calvinist. Most of them don’t have strong views on other theological aspects and therefore, I think people are choosing on other grounds.

It’s not unusual in the United States for somebody who’s raised as a Methodist to move to a different city and look around and decide well, “Here, in my new city, the group that seems most appealing are the Baptists.” So instead of being a Methodist, I’ll be a Baptist. So I think that’s probably the reason. But it would be interesting to know. I’m not aware that Putnam has a view on the subject. Maybe he does. But then it certainly is the case … and now we’re getting into material that I absolutely talk about in the book … and that is that different Protestant groups, and other groups too, have very different politics.

So the Episcopalians politically look very different from the Disciples of Christ. So if you have strong politics, you might want to go to a church where you’re not afraid to say who you’re voting for president and then once you’re at that church you then adopt their theology.

WALKER: In the last couple of years, there have been several brilliant books explaining the impact of religion, specifically Christianity, on the West and western thinking. Tom Holland’s Dominion, Joe Henrich’s The Weirdest People in the World and now Ben Friedman’s Religion and the Rise of Capitalism. Is that just random or is there some underlying factor that accounts for this interest?

FRIEDMAN: I don’t think it’s random, Joe. I think this is all part of the realization that’s been in place … I would say for some decades not just a few years … It’s all part of the realization that the so-called secularization hypothesis was wrong. If you go back to the early decades after World War II, lots of quite eminent scholars had the view that the world was becoming secularized, that religious belief was being left behind, that people might participate in the forms of religion, but they weren’t going to be believers, more and more people would drop out and the churches would become empty. You know the story.

And I would say that by the late part of the last century it had become clear that that turned out to be wrong. And the discussion was no longer about “Let’s think through the implications of the secularization hypothesis and see where we’re going,” it was “Let’s think about why the secularization hypothesis turned out to be wrong.”

I think the fact that I and other people are interested in this subject is a kind of reflection of that. We realize that we live in a world in which religion is pretty important stuff. To repeat, it isn’t important and central and institutionalized in the way it was in the England and the Scotland of Adam Smith’s day. But in terms of private thinking, it’s still there nonetheless and I think we’re aware of that in a way that people, a quarter century ago, certainly a half a century ago, weren’t. I think that’s the answer to what you’re looking for.

WALKER: I think at the same time, within the atheist movement itself there’s almost been a push back against the so-called New Atheism. I was raised as a Catholic, but became, I guess what I would describe as an atheist around the age of, I can’t remember 15 or 16. But I’ve had this real sea change in recent years where I’ve come to appreciate the importance or the role that religion plays for better and sometimes for worse, in part, through reading moral psychology and evolutionary biology. I’m thinking specifically of the work of John Haidt and David Sloan Wilson. But I think that New Atheism has certainly gone astray in its vociferousness in tone, but also its complete out of hand dismissal of religion in its substance.

In The Weirdest People in the World, Joe Henrich argues that the church’s abolition of cousin marriage set the western world on a pathway to free markets. What do you make of Joe Henrich’s thesis?

FRIEDMAN: I don’t want to comment on that one because I’m aware that there’s some controversy over whether he’s got the historical facts right. I’ve read some reviews of the book that assume he has. I recently read one by Charles Freeman, a very well-known historian of that period in the UK. Freeman, not like me, not F-R-I-E-D-M-A-N. Charles is F-R-E-E-M-A-N. Freeman thinks that Joe’s historical facts are wrong and I don’t pretend to know the difference. So I’m going to duck that one.

If I can go back to where you were a moment ago on your own reactions, you might find helpful a concept that I refer to in my new book. The name I give it and maybe others have used this as well, but I don’t know, is post-doctrinalism. And that’s an aspect of what I was referring to when I said that a lot of these denominations that in an earlier era would have thought of themselves as just completely different.

Now understand that they’re in the same business and they don’t emphasize the doctrinal differences among them. I’ll give you only two examples to indicate what I mean by that. About 10 years or so ago, our local Mormon church right here in Cambridge, Massachusetts, alas, burned down, very tragically. Fortunately, they’ve rebuilt it. Immediately after the Mormon church burned down, the local churches adjacent to them took in the various prayer groups. So the Episcopalians took in at their church the 10:30 in the morning prayer group. The Methodists around the corner took in the 2:30 in the afternoon prayer group. The Congregationalists nearby took in something else, et cetera, et cetera.

If you go back a hundred years ago, the possibility that the Episcopalians or the Methodists or the Congregationalists would have taken in and given hospitality to the Mormon prayer groups, that would never have happened. But today nobody thought anything of it whatsoever. They just thought of it as being hospitable to their neighbor who is in the same line of work that they’re in.

And I’ll give you a second example. There’s a very well-known church in California, the Saddleback Church, led by Pastor Rick Warren. Warren is very well known. He’s the person who was invited to give the invocation at Barack Obama’s first inaugural. There’s a young scholar, a religious scholar, who wrote an interesting book on predestination, the theory of predestination, who in the last chapter of the book describes his visit to the Saddleback Church in California.

Unfortunately, he didn’t get an appointment with Warren so he went over there and he talked to one of the assistant ministers. One of the first things he describes about this church is the absence of any signage to let you know what denomination it is. Turns out, the Saddleback Church is part of the Southern Baptist denomination. But if you did not know, you wouldn’t figure it out. There’s no sign that says that. And then this young scholar, I would give a plug for his book, his name is Peter Thuesen. I’ve never met him, but I certainly admired his book.

Thuesen writes that he keeps asking this assistant minister what the church’s view on predestination is. Because after all, that’s what Thuesen is writing a book about. He describes how the minister keeps deflecting him in his questioning. And after he does it enough, the young assistant minister finally gets frustrated and a little testy and he says, “Why are you bothering me with these questions about predestination? Stuff like that doesn’t have anything to do with what we’re trying to accomplish here.”

Well, my word for this is post-doctrinalism. People have affiliations, people have beliefs, people want to connect to the religious sphere of life. I’m referring to the United States. I don’t know if it’s true elsewhere, but for most, getting all exercised about this piece of doctrine versus that piece is just not something that captures their imagination.

WALKER: A survey taken in 2010 found that 41% of all Americans expect that Jesus will either definitely or probably have returned to earth by the year 2050. That’s in 29 years. What are the economic consequences of such a large number of people holding such a belief?

FRIEDMAN: Gee, I have no idea. I find it fascinating that that number of people have this belief. Incidentally, again, referring to this post-doctrinalism and the idea that Protestant denominations in the United States don’t differ very much in their theology. You’ve hit on one point where they really do and that has to do with the notion of the second coming, most of what we call evangelical denominations do very strongly believe in the real worldliness of second coming, and most of what we call the mainline Protestant denominations, that’s the Episcopalians, and the Presbyterians, and the Methodists, and the Congregationalists, and so on, don’t believe in that.

Now, I suppose that if somebody was really committed to that belief in advance, now adverting to your question before, maybe that person would feel uncomfortable in the Methodist church. But I doubt it. I think these eschatological views are not sufficiently … People hold those views, but I don’t think they’re sufficiently central that for most people they would govern a choice of denomination, such that a person would say, “I’m just not going to be an Episcopalian because I don’t want to sit in the pew next to somebody who doesn’t think that.” No doubt, there are some people, but I don’t think that’s too prevalent.

WALKER: Ben, there is so much in your book, Religion and the Rise of Capitalism, that we haven’t had time to speak about today. I recommend the book to people. I want to say thank you for all the work that you do and thank you so much for sharing your time with me today.

FRIEDMAN: Thank you for the conversation, Joe. I enjoyed this enormously. Maybe someday I’ll get to come to Australia and you and I will have a pleasant lunch together and we’ll get to meet. But I enjoyed this afternoon’s conversation very much. Thank you for having me.