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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer, an FT contributing editor, is chief executive of the Royal Society of Arts and former chief economist at the Bank of England
A century ago, people like me — macroeconomists — did not exist. Nor did macroeconomics itself as a discipline. It took the tumult of 1929’s stock market crash and the Great Depression of the 1930s to usher in an intellectual and policy revolution: the national accounts (the statistical bedrock for measuring the economy), macroeconomic theory (the conceptual basis for understanding the economy) and monetary and fiscal policy frameworks (to help the economy avert future tumult).
A century on, echoing Milton Friedman’s words in the 1960s, we are all macroeconomists now — armchair or otherwise. Small movements in GDP and inflation dominate public discourse. Taxation and government spending shape political and public debate. Yet the greatest peril facing us today is not a repeat of the Great Crash or Great Depression (though neither is impossible). Rather it is a widening of a “Great Division” that has emerged within and between societies over the past half-century.
We see those divisions at the geopolitical level in the increasing numbers of wars, real and trade-related, and an arms race in defence spending and tariffs. We see those divisions nationally, with fractured and polarised electorates engaged in fractious and polarising elections this year. And we see these divisions locally too, in the rising discontent and insecurity felt within many communities — something recent riots in the UK and Ireland illustrated only too clearly.
On the face of it, these divisions are difficult to explain. There has never been a time in history when the cats-cradle of human connections, globally and locally, has been more interwoven. Flows of goods, services, information, finance and people are at or close to historical high-water marks. Yet our networks have rarely felt more fragile. What explains this paradox?
Harvard political scientist Robert Putnam provided a compelling explanation at the turn of the millennium in Bowling Alone. Putnam identified the loss of social capital — an erosion of the social networks of trust and relationships, and the fraying of social fabric, within and between communities — as the culprit. He documented forensically the weakening of this social glue across the US since the second world war and the ways communities had come unstuck.
Putnam’s recent documentary, Join or Die?, shows that these patterns have worsened over the course of this century — and not just in the US. Unravelling of the social fabric has become an international norm. Research has shown just how large and lasting are the costs of bowling alone. From sub-par growth to stalling social mobility, from the epidemic in loneliness to the crumbling of communities, the erosion of social capital goes a long way to explaining some of our greatest scourges.
At the national level, cross-country evidence points towards a strong, causal link between social capital and growth, even once the other “capitals” more often focused on by economists (human, physical and, infrastructure) are taken into account. And the effects are large. A 10 percentage point boost in trust raises an economy’s relative economic performance by 1.3-1.5 per cent of GDP. If the UK could achieve Scandinavian levels of trust, this could add £100bn per year to our growth.
One key mechanism through which social capital boosts growth is by unlocking opportunity. Recent research by Harvard economist Raj Chetty et al suggests social connectivity may be the single most important determinant of social mobility. Providing a poor (typically disconnected) child with the network of a rich (connected) child boosts their lifetime income prospects by 20 per cent, according to Chetty’s estimates. Few, if any, policy interventions, education or otherwise, yield so high a life-long return.
These effects are just as large and lasting for non-financial measures of health. Century-long US studies tell us that the single best predictor of someone’s longevity and happiness is the quality of their relationships or social capital. As US Surgeon-General Vivek Murthy has observed, bowling alone is the equivalent of smoking 15 cigarettes a day, shortening lifespans and eroding mental health and wellbeing.
What is true for individuals and nations is also true for communities. In the poorest, security and solidarity sit at the top of residents’ hierarchy of needs, Maslow-style. Social cohesion and connection are known to reduce crime and antisocial behaviour and build pride in place and belonging. That makes social capital an essential foundation in making successful places. Without it, they atrophy or, worse still, riot.
The depletion of social capital matters in one further key dimension — the effectiveness of government. Government legitimacy and effectiveness requires public trust. This is currently in short supply. This year’s Nobel Prize winners in economics, Daron Acemoglu, James Robinson and Simon Johnson, have demonstrated that untrusted, extractive institutions can often be so ineffective that nations fail.
Almost a century ago, the Great Depression was the blowout that quickly heralded a revolution in economic policy. Today’s Great Division is a slow puncture, silently undermining us over more than half a century. Malign neglect of social capital has sowed the seeds of many of today’s largest problems, economic, social and spatial. Reversing course will require as large a leap in policy and practice as occurred a century ago. My next column will discuss this new model of capitalism.
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