Paul Collier & Dennis J. Snower
The social foundations of our economies are being tested. Fragmentation – by class, race, ethnicity, religion and nation – is having a powerful influence on economic performance and policy orientation.
Fragmentation arises from a wide variety of socio-economic processes. These include: the rising inequalities of wealth and income; growing disparities driven by education and skills; the gulf in the economic and social priorities of residents in global cities and elsewhere; and the rift in aspirations between young and old citizens.
These forms of social fragmentation have economic causes and consequences. Inequalities can erode trust and the social cohesion required for citizens to contribute willingly to the common well-being. They may generate political divisions between the rich and poor, between liberal elites and a disgruntled underclass, and between cosmopolitans and nationalists.
These divisions erode the efficiency of economic markets. After all, people in conflict are not inclined to exploit all the potential gains from trade. The divisions also affect the political process and may lead to economic policies, such as protectionism, that hurt overall economic prosperity.
The new Social Cooperation Hub of Rebuilding Macroeconomics aims to study the social substrates of economic cooperation, with a view to understanding the social relations underlying well-functioning economic activities and deriving appropriate policy recommendations.
The first premise of the Social Cooperation Hub is that economic cooperation requires social cooperation. People in conflict generally do not exploit all potential gains from trade. Transactions in economic markets usually require trust among the market participants, since purchases and sales are not perfectly synchronized. Contracts are mostly incomplete and require goodwill from both parties for their fulfillment.
“People in conflict generally do not exploit all potential gains from trade”
The second premise is that social cooperation has traditionally been shaped by social groups of limited size. These groups structure our identities and thereby shape our willingness and ability to cooperate. The bounds of social cooperation can be influenced by the strategic deployment by thought leaders of narratives, signaling actions and institutions, which can either align or contrast the interests and motives of large bodies of people, including national, religious, ethnic and other groups.
The third premise is that the scale of current macroeconomic problems requires social cooperation that exceeds the bounds of our current social groups. In particular, the integration of the global economy has generated global problems – financial crises, macroeconomic stagnation, and climate change – that extend beyond our social allegiances. Specifically, the global economy is not underpinned by a global society and this asymmetry helps account for problems associated with globalization.
At the national level, the scope of some markets often exceeds our ability to form equally far-reaching social affiliations. While we need larger groups, with the decline in spatial social interaction relative to issues-based homology, we are experiencing the opposite. Social fragmentation is increasing, both within and across national boundaries, generating declining levels of trust, and consequently greater obstacles to cooperation at the macroeconomic level.
The final premise is that effective macroeconomic policies need to foster, or be accompanied by, measures that extend the bounds of social cooperation in consonance with the desired bounds of economic cooperation. In other words, traditional macroeconomic policies need to be supplemented by social policies. The design of macroeconomic policies should be accompanied by institutions, norms and policies that build social identities corresponding to our economic objectives.
Trust and the ‘Productivity Puzzle‘
We intend to hold concurrent brainstorming workshops in London and Oxford to explore ideas which will form the basis of our calls for research. The ideas discussed in the workshops are to generate interdisciplinary research covering the overlap between economics (on the one hand) and social psychology, social neuroscience, sociology and anthropology (on the other).
Our first pair of workshops will examine how the decline in social trust might reduce productivity. We have identified two examples of how this may happen as the basis for our discussion:
Excessive focus on intra-temporal labour allocation to minimize unemployment may undermined the trust relationships between employer and employee necessary for investment in skill and hence inter-temporal resource allocation
Relationships between firms and workers have shortened; unions have been weakened and apprenticeships dismantled; and a new migration policy encouraged an influx of pre-skilled immigrant workers. Cumulatively, these changes may have reduced the efficiency of inter-temporal resource allocation in the labour market, as firms and workers rein back their investments in skill. This has been compounded by the excessive prestige in Britain for degree courses relative to non-cognitive training.
Reciprocal Obligations versus Monitoring and Incentives.
Complex organisations face a ‘compliance problem’: how to motivate employees and other parties to transactions to perform actions that they would prefer not to do. Economists suggest intensifying performance monitoring and linking it to high-powered incentives. Yet this can backfire as employees divert effort to what is monitored, and other systems of motivation are inadvertently undermined.
Meanwhile, large organizations (commercial and public) under mounting pressure from litigation have switched from trust to hiring lawyers to write more complete contracts. This is infeasible in many instances but imposes a burden equivalent of technical ‘regress’ and may demean and demotivate staff who are subject to it.
We are hosting two seminars on the 10th and 11th October. You can read more about them here. If you would like to attend one of these sessions please email firstname.lastname@example.org.