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On social capital and inequality

Christopher Joye
10 January 2011

While I was on my summer sojourn I took time out from the standard financial markets fare to read two reviews of a new book, Disconnected, by the up and coming Labor MP, Andrew Leigh. Dr Leigh draws on the research he produced while serving as one of ANU’s youngest tenured professors to track the decline in that complex notion called ‘social capital’ over time. His work prompted two thoughts.

The first observation is that a lot of people get awfully worked up about ‘income inequality’. I am not entirely sure what they are on about. That is, I don’t think there is anything wrong at all with a rise in income inequality if one assumes that:

  1. We have equality of opportunity.
  2. We are committed to combating extreme poverty.
  3. We are vigilant in protecting those members of the community who are fundamentally and irreversibly disadvantaged through, say, mental or physical disabilities.

In fact, I think we should be focused on dealing with 1, 2 and 3 rather than drumming up hysterics about inequality. It turns out that Dr Leigh’s own research backs up this view.

If we hold these three variables constant, one can be comforted that a broad rise in income inequality in a stable democracy more likely than not reflects a rich, diverse and meritocratic society that is generating not unsurprising differences in economic outcomes care of its differential endowments in ability.

Furthermore, I am pretty sure that the latest research shows that rising income inequality is a relatively recent phenomenon (that is, since the 1970s), and it is not clear to me that this will necessarily persist through time. That is, it is just as likely to be a once-off 'level effect' that manifested as a result of the relentless centre-right campaign of market liberalisation that took place over the last three to four decades.

These are loose words for describing the fact that it is vastly easier today for any man on the street to capitalise on his latent potential and create, say, significant wealth through innovating than it has been at any other time in history. Put differently, the barriers to entry to human progress today are arguably lower than they have been at any other point since homo erectus.

I am much more worried about poverty and inequality of opportunity. Obsessing over income differentials, on the other hand, is a potentially dysfunctional development. What alternative reality are these advocates striving for? Income equality? Nobody serious today would support that. Maybe 'greater income equality'? I don’t really think so. And, if you are gunning for the latter, who should be entitled to determining what the appropriate benchmark for greater income equality is? I know of nobody suited to the task. It is not hard to work out that pushing equality is a very slippery ideological slope.

In his own academic research, Dr Leigh struggles to find any compelling evidence that rising inequality is associated with higher crime rates or deteriorations in health and life expectancy. In fact, he concludes that increases in income inequality are – as I would expect – correlated with higher economic growth. Simply put, the more opportunities that you give to people to fulfill their potential, rather than coercing them to revert back to the financial mean, the more dynamic an economy you are likely to end up with.

Leigh concludes that “those who believe in the ideal of a more equal Australia will be disappointed to learn that the ‘instrumental’ case against inequality is so weak”. Instead, he argues that “policymakers ought to worry about inequality if it offends the typical person’s sense of justice. We all have different feelings about how much inequality is tolerable, but most people have a visceral sense that at a certain point, the income gap can grow too wide.”

This strikes me as weak stuff: we should not be setting economic and social policy by appealing to the law of averages, or some visceral gut feeling about right and wrong. This does not come remotely close to satisfying the hard, evidenced-based policymaking tests that Dr Leigh himself has been such a strong advocate of.

The second thought that sprung to mind relates to this nebulous conception of ‘social capital’. Apparently Dr Leigh identifies a secular decline in this difficult-to-measure idea. Yet I would put to you that we are experiencing a revolution in the quality of our social capital – perhaps after a period of sustained atrophy – via that very obvious medium: the Internet.

Through blogs, Twitter, Skype, Facebook, email, and countless other online devices (for example, those furnished by major media groups) we are connecting with hundreds if not thousands of people we would never have previously had an opportunity to interact with, and on a more regular and intensive basis than has ever been possible before in human history.

Indeed, another thought occurs to me here: after decades of decline induced by the telephone, the written word is making a comeback care of the Internet.

Thinking optimistically, one would hope that the democratisation of information and human interaction will minimise the probability of misanthropic behaviour by nation states or agglomerations of individuals. That is, the Internet will hopefully be a force for good in the world and help prevent a repeat of the World Wars experienced during the twentieth century. Why? Because independent and otherwise geographically isolated people can band together to thwart evil in a way that has never been possible before. Looked at through this lens, it is no surprise that the face of the Internet, and one of the biggest companies on earth, has a corporate motto along these lines: “do no evil”.

And it is wrong to suggest that these online relationships are trivial. Many of our most important personal and professional friendships are facilitated by the Internet (myself included). And this is even more true of the tweens and twentysomethings growing up during the digitally-enabled 2000s.

My point is this. Anyone claiming social capital is on the decline is kidding themselves. Many of the traditional volunteer organisations of the last century are being replaced by online movements enabled by the likes of Facebook, Twitter and the blogosphere, which permit both live textual and video chat, and other substantive communications.

Countless examples spring to mind. My local community rose up via Facebook to block the erection of a major utility works in the middle of our only park. A friend of mine brought to my attention the work of a Melbourne netizen who was organising a campaign to digitally record attacks against Indian students via Google Maps. Wikileaks and its 600,000 followers are promoting open governments in an unprecedented way.

If social capital is understood as our degree of interconnectedness, the frequency with which we interact and directly communicate, the extent to which we are concerned about our fellow citizens and the welfare of our world, and, crucially, the ability of communities to effect change that reflects their preferences, then I would submit it is on the improve.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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