EVERY JANUARY there is a strange migration. Thousands of economists from around the world flock to a large American city for the annual American Economic Association (AEA) meeting. The pandemic turned the rite on its head this year, instead allowing conference attendees to peer into the living rooms and offices of scientists as they showcase their work, much of which focused on the aftermath of covid-19 on Zoom. The events of 2020 highlighted the importance of prosperity factors that economists often neglect, such as government capacity and social trust. Perhaps as a sign of a change in future economic thinking, part of the tariff on offer at this year’s Shindig suggested that increasing affluence is often a matter of collective choice rather than maximizing efficiency.
Discussions about the role of social norms and values were spread throughout the conference. The scientists presented work showing that higher levels of trust and social responsibility were associated with less skepticism about media coverage of Covid-19 and greater willingness to adopt strict lockdown measures. Other studies have shown that gender-specific aspects of corporate culture are largely determined by the norms applicable in local society, but can still be shaped by national politics. Still other papers examined how economic factors contributed to the dissolution of political norms and the possible collapse of democracy in Europe before World War II.
The clearest discussion about the importance of social forces – and the tendency of economists to overlook them – was in a keynote address given by Emmanuel Saez of the University of California at Berkeley. He is known for his work gathering historical data on income and wealth inequality, but his presentation was far more philosophical than empirical. In it, he asked his fellow economists to reconsider their usual approach to the welfare state.
As Mr. Saez noted, the Standard Framework assumes that society is made up of rational individuals who make decisions based on self-interest. Deciding how much to save or what type of education to get depends on people’s understanding of their own conditions and preferences. Economists working under these assumptions can support welfare programs in the event of market failure. Unemployment benefits are needed, for example, because the credit markets are far from perfect and an unemployed person cannot simply borrow to compensate for a temporary loss of income, even if they are confident that they will eventually find work. However, the assumption of a rational self-interest severely restricts the welfare state. Generous benefits and the high taxes required to finance them will deter rational people from work and undermine economic growth and the government’s ability to serve those in need.
In practice, however, Saez explained, the world works differently. Societies have largely chosen to tackle problems such as poverty in old age and inadequate schooling with collective rather than individual solutions through universal pensions and compulsory education. These social choices are, in part, a response to the difficulties people face in providing such things for themselves. But they also reflect values such as notions of fairness. The fact that society regards education as a social good and provides the means to do so encourages young people to go to school for years, regardless of whether it is a rational economic choice. And as behavioral economists have shown, people don’t just behave as stubborn rationalists. The fairness of the results matters to people and they are willing to make sacrifices for the common good in an environment of social trust and reciprocity.
These observations should influence the analysis of public policy. The decision to work can be influenced, for example, by norms and financial incentives. If economists only consider the latter, they could overestimate the work-discouraging effect of welfare systems. Employment rates for prime-age men are remarkably similar in rich countries, Saez said, despite large differences in tax and welfare systems. The average tax rates in France are about 20 percentage points higher in income distribution than in America, but about 80% of middle-aged men work in each country. (Americans work more hours, but as Mr Saez noted, this also reflects social choices, such as the shorter work week set out in French law.)
There is strong social pressure on healthy men not to be viewed as “freeloaders”, which counteracts the incentives provided by higher taxes or greater welfare controls. Where social pressures on work are ambiguous – such as for young and old, or in many places for women – generous benefits tend to have a greater impact on employment decisions, Saez said. However, this reinforces, rather than undermines, the idea that social factors have important implications for economic decisions.
Fair is fair
When social norms protect against “bad” behavior – such as voluntary unemployment or tax avoidance, which could be seen as an unfair advantage of the system – welfare states are less a compromise between efficiency and equity than many economists suggest. In such cases, analyzes using assumptions of persistent self-interest, such as descriptions of how state systems could fail if, for example, social guard rails are allowed to erode, remain useful. However, they are not necessarily the best predictors of what will happen, and failure to take social preferences seriously could shake economists’ rules to make societies more egalitarian and dynamic.
Of course, culture is slowly changing, both inside and outside the economy. Mr. Saez is much further than most of his colleagues when it comes to emphasizing the role of social factors. But just as the global financial crisis of 2007-09 led to a rethinking of the professional understanding of financial markets and macroeconomic policy, the pandemic could draw attention to other blind spots. If the conference takes place next year, it may be, in many ways, a much more social event than this year.