Does social cooperation affect macroeconomic performance?

 Hub Co-Leader: Prof Dennis Snower

Prof Dennis Snower rebuild macroDennis Snower is President of the Kiel Institute for the World Economy, and Professor of Economics at Kiel University. He is an expert in the areas of social and behavioural approaches to global problems, and in understanding macroeconomic policy under market imperfections. Some of his recent work with colleagues at the Kiel Institute has examined challenges to global cooperation and global inequality.

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Hub Co-Leader: Sir Paul Collier

Paul Collier rebuild macro

Sir Paul Collier CBE, FBA is Professor at Oxford, Professorial Fellow of St. Anthony’s College, and a distinguished author having publishing such books as: The Bottom Billion; Wars, Guns and Votes: Democracy in Dangerous Places; and Exodux: How migration is changing our world. Paul is an expert in the development issues facing low-income countries and international relations. He was knighted in 2014 for services to promoting research and policy change in Africa.

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Macroeconomics assumes people act in their own self-interest, but we know from experience and psychological evidence that humans often cooperate. In a world of radical uncertainty, where we cannot know what might happen, working with others has been seen to deliver the best economic outcomes on average in our evolutionary history. But what does social cooperation mean for inclusive growth today, and how does it affect macroeconomic performance?

We have a tendency to reciprocate good deeds done to us, and to be altruistic through random acts of kindness to complete strangers without wanting anything in return. Social cooperation is not the focus of macroeconomics and is at odds with the competitive and self-interested assumptions made. Does this abstraction ignore a key factor in the development of human civilisation that got us to where we are today?

We tend to cooperate more with people who are similar to us, i.e. with those who share our group identity. Because of this, our behaviour is in part dependent on the social context we are in, meaning our preferences are not fixed. If group identities motivate our behaviour then it might be useful to incorporate this effect into macroeconomics, and if so, how can this be done meaningfully? How would macroeconomic models change if we include this psychological and sociological evidence?

Research suggests that a pursuit of materialistic wealth can come out of habit because we see everyone else around us doing it. Ironically, this behaviour is often related to lower levels of happiness – the Easterlin paradox. Can the influence of groups on our own preferences sometimes be against our own self-interest? What does this imply for inclusive growth and the ways we measure it?

A simplification often used in macroeconomics is to treat everyone as the same so that you can talk about the economy on the whole by just describing how the typical person behaves. Doing this ignores the meso-level (the bridge between micro and macro) of social groups which may be the most important coordinating unit in the macroeconomy. Narratives of these groups may support or frustrate policymakers’ ability to influence the economy. Do groups make it easier or harder to compensate those who win or lose?

If we have a desire to cooperate with one another, then this suggests multiple objectives for macroeconomic policy above a narrow focus on GDP. The focus would not only be on making the economic pie bigger, but on where the different things produced in the economy are going. Such as including measures of health outcomes, spill-overs and trade-offs between different groups and the possible policy responses to these issues. Is it possible to measure the benefits or costs of cooperation in a variety of different situations?

What is the role of cooperation in economic policy? Past policies explicitly promoted integration with a view of supporting social cooperation e.g., socially mixed housing, comprehensive education, and the National Health Service. Looking back, have these policies helped improve social cooperation in society and inclusive growth? If policy can affect social cooperation in society, what would ideal cooperation look like for different situations?

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