Capitalism’s Unintended Consequences

By: The Neumann Forum

Since the Second World War, Gross Domestic Product or GDP has been the key metric that all policymakers sought to increase. As globalization accelerated in the 1990s, countries have tried various liberalizing economic policy arrangements to increase their GDP and hence their wealth.

While GDP is an extremely important metric when considering the development of a country, it is not the only one. In 2015 the economist Angus Deaton received the Nobel Prize in Economics for his work, which included his study of ‘deaths of despair’. Deaton showed that, although GDP in the United States continued to rise in the past thirty years, mortality rates were increasing for certain social groups – most notably working-class white Americans.

Deaton’s analysis overlapped with the work of political scientist Charles Murray. Murray showed that the social groups most adversely impacted by deaths of despair also saw a rise in various other social pathologies. Murray noted that lower-income groups were less likely to marry, less religious, less industrious, and more politically and socially disengaged.

These trends have been extensively debated amongst intellectuals and policymakers. But a core question has, until now, not been asked. Namely, is there a relationship between liberal economic development and social decline? Social decline can clearly occur amidst economic growth, but what if this economic growth itself is partly causing the social decline? Historians have long noted that wealthy societies can tend toward becoming ‘overripe’ and decadent as they age. But this prospect is rarely raised today.

In a newly commissioned study, The Newmann Forum asks this question. Our researchers have taken an in-depth look at the case of Ireland. We use Ireland as it is a perfect self-contained case study. Ireland has kept good statistics on many social trends over the past 60 years. The country opened itself up to Foreign Direct Investment (FDI) in the 1990s and has since become one of the most successful small, open economies in the world.

Our research findings are stark. There is no doubt that economic liberalization during the 1990s has created great wealth in Ireland. The so-called ‘Celtic Tiger’ was no doubt a real phenomenon and we show that it was driven by massive influxes in FDI. But this economic growth has come at great social cost.

We show that during this period, from trough to peak, the suicide rate rose 655%; the homicide rate rose 609%; alcohol consumption rose 128%; drug deaths rose 6,115%; and the fertility rate fell 58%. These trends were already incipient before economic liberalization, but they sped up dramatically during the period of liberalization. We also note that the Irish political system has become fragmented and dysfunctional during the period of liberalization.

We then turned to cross-sectional analysis based on the various counties in Ireland to see if we could more firmly prove that the causality ran from economic liberalization to social decline. Doing so we found that FDI inflows were the most important causal force in Irish cultural change. Regions that had high levels of FDI changed more dramatically than regions that had lower levels. We show that FDI directly impacts: the religiosity of the population; the liberality of the populations’ political views; and the rate of drug offences. Further to this, the liberality of the populations’ views – itself driven by FDI inflows – has an impact on political fragmentation, fertility rates and drug deaths.

Our research shows clearly how liberal economic growth can bring with it social dysfunction. This is a hugely significant finding for both small and large countries. Large countries, like the United States, can look at Ireland as a controlled experiment showing that there are key linkages between rapid, liberal economic development and social decline. This information is vital to understanding the social decline that is taking place across the United States and other large countries.

Small countries looking to emulate Ireland’s economic model should first consider the cultural and social impacts. We believe that there may be ways to generate economic growth through FDI inflows and at the same time protect the local culture and society from degradation. Specifically, we point to the possibility of: promoting friendly or value-neutral capital inflows; shaping laws and rules so that foreign companies are incentivized to conform to the local culture; and building high prestige networks that attach to local cultural institutions as an alternative to the networks created through the institutions built by foreign capital.

We believe that we have shown that rapid, liberal economic development may generate great wealth, but it also generates social instability and cultural decline. Policymakers should seek to come to terms with this reality and seek to shape policy in such a way that the benefits of economic development are harvested, while the costs it can have in social and cultural terms are minimized.

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