Good times can beget good times

I have mentioned a couple of times in this space that our experiences shape our investment preferences and our outlook on the world. People who lived through the Great Depression held fewer stocks and were more afraid of inflation for the rest of their lives. Similarly, people who banked with a bank that went bankrupt in the financial crisis of 2008 were more risk averse years after the crisis ended.

But personal economic experiences also matter for political attitudes. Analysing people who grew up in communist East Germany and comparing their behaviour to West Germans after reunification showed that East Germans were consistently more in favour of state intervention to alleviate inequality. The effect was stronger for older people who lived under communism for a longer time.

In a global study, Haoyang Li and Xiaomeng Zhang examined how people across the world reacted to differing lifetime experiences in terms of GDP growth of GDP growth. Do people who live in countries with stronger economic growth behave differently than people who live in countries with weaker growth?

The answer is – as you may have guessed – yes. In their study, they find that people who have a lifetime experience of higher economic growth are less altruistic and less trusting to others than people who have a lifetime experience of lower economic growth. This is of little surprise since in a prosperous, fast-growing economy, fewer people are struggling, and hence fewer people have to rely on others for financial or other help. In essence, fast growth and prosperity make society more selfish because there is less need for social networks other than to get ahead in life (e.g. in your career).

However, on the positive side, experiencing a faster growth environment also makes people more patient as investors. And where investors become more patient, their savings rate increases. But as many of us have learned at university, savings equal investments in macroeconomics (you can only invest what you saved previously). And investments increase economic growth. Thus, strong economic growth in a sense begets future strong economic growth because people who experienced more growth in their lifetime are more likely to save money and invest it, which creates new economic growth, which increases savings by investors, etc.

This is also why all this talk we have in the UK about ‘Broken Britain’ is so corrosive. As we in the UK lament the dismal state of our economy, we are starting to save less (the cost-of-living crisis is obviously not helping at all) and businesses invest less in the UK. This means that UK economic growth remains low, which means that Britain really does get broken and has little chance to heal itself…