Growth Through Friction
Mandeville had an uncomfortable idea: a society does not live economically only from its virtues, but also from its imperfections. Vanity keeps tailors in business. Illness keeps doctors busy. Conflict gives work to lawyers. What appears morally or socially as a flaw can generate economic activity.
Perhaps this idea can be applied to modern service economies.
A society can grow not only because it produces more. It can also grow because it has more problems to deal with.
At first, there is nothing remarkable about this. After a hailstorm, roofs need to be repaired. More crime creates additional work for the police, private security and the courts. Cyberattacks increase the demand for IT security. Illness creates demand for medical services. In all these cases, economic activity is generated.
But this does not mean that society has become wealthier because of the underlying damage.
Gross domestic product measures what is done and paid for in an economy. By itself, it does not distinguish between activities that create additional value and activities that become necessary because a problem has already occurred. Economists sometimes speak of defensive expenditure: spending that compensates for an existing problem or burden rather than directly creating additional prosperity.
The distinction, however, is less simple than it first appears. A language course for someone who later finds work and pays taxes is not merely defensive expenditure. It may be an investment. A permanent support structure that does little more than manage an existing integration gap is much closer to what is meant by defensive expenditure.
The important question is therefore not only what money is spent on, but what that spending achieves in the long run.
Migration is an especially interesting and politically difficult case.
Immigration can strengthen an economy directly. People arrive, work, consume, start businesses, pay taxes and fill gaps in the labour market. With skills-based labour migration, this mechanism is relatively easy to see.
But migration also takes place through other routes, including the asylum system. There, people are not primarily selected according to whether they are likely to become economically productive immediately. They arrive with very different levels of language ability, education, health, legal status and cultural experience.
This can create additional institutional work: language courses, social work, job coaching, school support, medical care, administration, legal advice, housing support and integration programmes.
These activities also create income and appear as economic output.
This produces a curious paradox. A person who arrives and immediately takes a job contributes to economic output. But supporting a person who initially requires extensive assistance also creates economic output. Social workers, teachers, interpreters and job coaches receive salaries, consume goods and services, and pay taxes themselves.
GDP records both as economic activity.
But that still does not tell us whether both create additional prosperity in the same sense.
And even this distinction should not be understood statically. Someone who enters through the asylum system today and needs language courses, welfare support and job coaching may be working, paying taxes and requiring no support a few years later. What initially looks like defensive expenditure may turn out to have been an investment.
The reverse is also possible. A support structure may remain in place indefinitely without ever producing greater economic independence.
The crucial question should therefore be: Which forms of expenditure lead where?
There is another curious effect. The need for support is institutionally highly visible. It produces files, appointments, budgets, programmes and professional activities. Successful integration, by contrast, may become invisible precisely because these things disappear. Once someone works and no longer needs assistance, that person simply drops out of the support system.
It would therefore be just as wrong to treat every initial support cost as a permanent burden as it would be to equate additional economic activity automatically with additional prosperity.
The more interesting question is how often initial support leads to long-term independence, and how many resources remain permanently tied up where that transition does not succeed.
This is where Mandeville and Bastiat meet in a curious way.
Mandeville reminds us that even social imperfections can generate economic activity. Bastiat reminds us that visible economic activity alone tells us nothing about whether a society has actually become wealthier.
A modern service economy can grow through its strengths.
But it can also grow because it spends ever more resources dealing with difficulties.
The decisive question may therefore not be whether a society is growing.
It is this:
How much of that growth creates new prosperity, and how much merely manages friction?