on August 21, 2013
Edmund Phelps has delivered a hugely important book destined to become a genuine classic and, for sure, a "must read" for anyone interested in why economies work and don't work. It contains unique insights about economic progress in the past and the public, private, and cultural changes needed to restore dynamism which is reflected in people at the grassroots level with the will and capacity to pursue the "good life" of working to develop and commercialize new ideas.
What particularly struck me is the enjoyable learning experience from reading how the author unpacks the core ideas of important thinkers, ranging from Aristotle to Schumpeter, in such a condensed and revealing way.
Phelps has a gift for open-minded inquiry of the past that applies hard-nosed, constructive skepticism to alternative explanations of the historical record and for plainly describing the logic of his own conclusions.
If your reaction to reading this book is similar to mine, you will want every politician, federal and state, to study pages 310 to 324 that explain how best to enable dynamism on a large scale. This is not about any political ideology ---- simply superb research and persuasive logic.
on September 24, 2013
Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change is an investigation of what drives inspiration and entrepreneurial spirit at the level of the individual. In this work, the author attempts to analyze what institutional arrangements foster the creative process and ability to capitalize on them for the benefits of society. The author looks at various economic regimes and focuses on socialism, corporatism and modern capitalism and compares their merits with respect to nurturing the population's creative talents. This work measures fairly objective functions like productivity growth but gets into the bold philosophical territory of happiness and what drives it in people. In particular work satisfaction and its impact on overall happiness as well as innovation.
The author starts by debunking aspects of classical economic growth theory in which economic growth is exogenously determined through accumulation scientific knowledge and its permeativity within the population at large. The author disputes the idea that scientific frontier knowledge drives innovation in terms of productivity growth and notes the inventors of the 19th century often had no scientific training. The author describes the importanice of local knowledge that citizens all accumulate and the ability of them to use that knowledge to drive innovation and take risks that is far more important in driving productivity than abstract knowledge at the academic frontier. The author focuses on the UK and the US in terms of best environments that fostered innovation.
The author moves on to describing the competing economic regimes of the 20th century. The three major economic regimes are socialism (as pioneered in russia), corporatism (as advocated in Italy and Germany) and modern capitalism (as blueprinted by the US and UK). The author discusses his views on economic philosophy throughout and believes that growth and innovation must be considered as separate. In particular economies replicating productivity increases elsewhere need not be innovative as technology can be transferred instead of innovated hence productivity growth at the efficient frontier is what is the true test of dynamic society. In that respect the author sees socialism and corporatism as failing obviously. There are some tail statistical cases which can be used as examples of the success of corporatism or socialism, but these are the mere statistical anomolies that are inevitably to show up when there is a distribution around a mean. The author begins to discuss the effect on hapiness of an economy's dynamism. They note through questionaires responses that job satisfaction drives life satisfaction and that modern capitalism creates a more satisfied population through their ability to have more self determination.
The author then discusses where we are today. He notes the decline in productivity growth in the 60s and goes through a history of social reformation through the US, UK and Europe. The author then discusses some philosophy about what goes into a good life, using Aristotle as a base. He discusses the idea of self worth and pursuit of knowledge and achieving purpose. Clearly there is a lot of subjective material that reinforces the idea that creative destruction determined from the grassroots level is preferable to a culture of countercyclical economic culture that retards the desire to innovate through diluted returns to risk takers. It does become clear where the authors foundational "axioms" come from that strongly determine why modern capitalism is argued to be superior.
This is a solid work on innovation and what is needed to foster it. Removing the incentives to the entrepreneur come with dire repurcussions to long run vitality and that is an important observation. Given how many US companies remain in the top 50 and how dominant they are in the top 10 (by market cap) is a reminder of the strength of US corporate dynamism and spirit. There are failings within the US system that are marginilizing the impact of potential innovation from the grassroots as more of the workforce is excluded from that process- these must be improved for the US to continue to innovate and be a world leader. This is a philosophical work with a strong message. There are aspects of this kind of thinking in the history of economic and philosophical thought and this is not entirely new. All in all it brings focus to what really drives human progress and that is continued human innovation which the author strongly reminds us- is not a given.
on February 10, 2014
Harry Truman notoriously complained that "All my economists say, 'on the one hand ... on the other'" and demanded: "Give me a one-handed economist!". Well, here he is. The author presents a very passionate summation of views he has been developing over several decades as a prominent professor or economics at Columbia University, in the course of which career he was awarded the Nobel Prize for Economics in 2006. In two sentences, his thesis is that 1) differences in economic values between societies largely account for differences in productivity and growth; and 2) societies need to cultivate and perpetuate attitudes of dynamism and innovation for the great mass of their society to flourish, hence the title "Mass Flourishing".
The book is a blend of economic analysis and lessons found in certain of the great books of Western civilization. The economic analysis appears more in the first part of the book, although not exclusively. He then develops a three-part taxonomy of present-day economic perspectives: a modern, dynamic, innovative one that he is passionate about, and two that have grown up in reaction to the uncertainty posed by the modern approach: the failed Marxist-socialist one; and what he calls the "corporatist" one, by which he means economies in which large organizations of labor, capital and government all have developed over time to stultify innovation and dynamism. The author demonstrates how Western European societies in particular have stagnated economically due to a lack of dynamism and innovation, and contrasts that, of course with the US's relatively greater successes in those respects.
After laying out the failings of the alternative models, he seeks to develop an intellectual defense of the "modern" economy as "good and just" (I note he conspicuously tries to avoid using the word "capitalism" to define such an economy; I am not sure why). Columbia University where the author has taught most of his career is famous for its "core curriculum" in which undergraduates spend several semesters reading from the canon of Western civilization, in both the humanities, in political and social philosophy, and art and music. I can imagine Professor Phelps must have taught some of those courses at times as the book is steeped in references to many of those works. Just in the A-C portion of the index, I see references to Aristotle, Austen, Bach, Balanchine, Balzac, Leonard Bernstein, Lord Byron, William Blake, the Brontes, Cellini, Cervantes, Cezanne and Voltaire's Candide. Historians of political thought like Toynbee, Polanyi, Popper and Spengler are referenced. From the realm of economics, the thought of Adam Smith, of course, Hayek, Schumpeter and Marx are discussed, as are more modern figures like Gary Becker, Jared Diamond, Robert Gordon, Walt Rostow, Amartaya Sen and Luigi Zingales. For some reason, he does not mention Douglas North, although his focus on institutions and values is very much in the same camp as North.
But the greatest intellectual link Phelps establishes is to the work of John Rawls, with whom he apparently shared an appointment or grant at Berkeley back in the late 60's when Rawls was writing "A Theory of Justice". The last third of the book is an attempt to place the author's vision of the market economy in the context of Rawls' philosophy of "justice as fairness". I have always been a skeptic of "A Theory of Justice" which, in my view, depends for its foundation on a series of "make-believe" propositions that I reject as a proud member of the "reality-based community". Phelps focuses more on the later restatement of Rawls' philosophy, Justice as Fairness, which is meaningfully different from the earlier work.
Phelps is a proponent of some kind of wage subsidy being extended to employers of lower-paid workers and argues this is consistent with Rawls' redistributive principles. He draws out of Rawls an under-recognized endorsement of the market economy and of economic growth and efficiency. As well, he emphasizes Rawls' very insightful and timely dictum that people who want "to surf at Malibu all day", and thereby drop out of the collective effort to make the economy as large as possible have no just claim to receive any redistribution of the fruits of the economy.
Of course, that brings up, or ought to, the role of the welfare state in relation to the loss of dynamism / stagnation of modern Western economies . Most unfortunately, Phelps's passion seems to abandon him and he dodges the topic altogether, which is a glaring flaw in his theorizing. What does he believe about, for example, Social Security which draws people out of the labor force, albeit people who may be less likely to innovate and take risks than new entrants? When President Obama asserts that such programs "make us free" to pursue economic growth, as he did in his second inaugural, that kind of claim deserves to be examined, but is not. When CBO estimates that the subsidies under the Affordable Care Act will induce the equivalent of 2.5 million full-time equivalents to drop out of the workforce, although it came after the book was published, what would an advocate of greater dynamism say? Phelps should have spoken to the welfare state directly. I guess that is how he avoids being a two-handed economist.
Additionally, his prescriptions for increasing dynamism are extremely vague and ivory tower-y and in the case of his call for states to fund venture capital banks, absurdly at odds with his prior criticism of government - business "corporatism" and apparently blind to the soft corruption and value dissipation that such a politiciz-able honeypot would be prone to engender (see Solyndra, for instance).
Ultimately, it is an intellectually impressive summation of many strands of thought in Western civilization, and a fair critique of the shortcomings of the present-day bureaucratic Western state, but as I see so often in books on public policy, it is much weaker when it comes to the specifics of the implied solutions.
on January 31, 2014
Many people have suggested Mass Flourishing is an instant classic. While it possesses many of the trappings of a classic, I do not believe it deserves or will ever attain such a status. The author's observations of society are too counter-intuitive, his engagement with philosophical ideas too undeveloped, and his economic prescriptions too likely to result in mass-suffering, for the depth of his vision to hang together in such a way as to bear the test of time.
Phelps asserts that economists have tended to argue this or that policy will bring growth, while ignoring the purpose of growth. For Phelps, economic development is integral to human development. The point of economic development is not simply to generate wealth, which might be exhausted in leisure. Rather the point is to generate the human capacity to innovate. According to Phelps, innovation is what gives life meaning. But he focuses on a specific kind of innovation, which capitalism inspires: the urge to take on new challenges, to solve new problems, to struggle, and ultimately to create. He refers to a life of such engagement as a flourishing life. And he argues that unrestrained capitalism inspires such experiences. Further, he argues that through work, humans can fully engage their minds in solving new problems as they arise in every area of a business and in so doing they generate wealth, which provides further opportunities for individuals to flourish. His arguments echo those of Schumpeter and libertarians, like Hayek and Von Mises. But he claims they have treated innovation as merely a means to an end, which for them is freedom. For Phelps, innovation and the capacities is brings forth is an end in and of itself. In this sense, his ideas are more close to those of Ayn Rand, whom he fails to reference.
Phelps contrasts what he refers to as "modern values," which he embraces, with "traditional values," which he seeks to cast aside. In the later category, he includes the interest in family, community, service, and contemplation. While he acknowledges that some people value such things, he does not deal with the fact that his version of the good life fails to account for the vast bulk of what humanity has, throughout history, found to be most meaningful. His ideal of innovation, as the engaged and active life, fails to account for the desire to spend time with family, the urge to be part of a community, the pleasures of empathy, of giving, of service, of contemplation, and of philosophy. While he references great thinkers like Aristotle, Nietzsche, William James, John Dewey, Abraham Maslow, and John Rawls to support his argument for a more engaged life, he does not note that these thinkers were deeply interested in many of the so-called "traditional values," which Phelps so denigrates. For Aristotle contemplation was the highest one might attain to; Nietzsche was not interested so much in work but in bringing new values into being, and this often involved long bouts of solitude and a rejection of the engagement with business, which spurred so much of the innovation Phelps values. William James saw mystical experiences as the most meaningful part of many lives and attests to the value of such experiences in great depth in his classic, Varieties of Religious Experience. The list goes on. This does not make Phelps wrong about his intuitions, but it puts him out on a limb. And while he holds his own in his engagement with philosophical thinkers, it is easy to come away with the impression that he has not really given himself to the effort to answer what constitutes the good life.
Mass Flourishing might only be a classic insofar as it ties this deeper vision of the good life into a set of observations concerning the direction in which developing economies and societies are headed and then links this to an economic analysis that accomplishes its goal of bringing about "mass flourishing." But Phelps' observations of society and the economy seem just as unbalanced as his vision of the good life. Phelps argues that it is government regulations that have stifled the innovative spirit. This is a common intuition amongst libertarians and conservatives, of which Phelps does not count himself. He argues that nineteenth century British capitalism has been deeply misunderstood. The prevalence of the "dark Satanic mills," has been exaggerated, and the wages of the Oliver Twists were rising far faster than most historians have previously suggested. For Phelps the spirit of innovation was strongest in the nineteenth century and only declined throughout the twentieth century.
Since Phelps is concerned with "mass flourishing," and not just the flourishing of elites, for his argument to work, it must not only be elites who were innovating in the nineteenth century but also the masses. Oliver Twist needed to be exercising his creativity, drawing on his intelligence, problem solving, embracing challenges, and this needed to bring about his flourishing. While I am well-versed in the economic and social history of this era, I am aware of no other thinker who suggests that this innovative spirit was broadly distributed in the early days of industrialization. Most economists have argued, on the contrary, that economic development was necessary to lift more and more people from the stifling condition of urban, industrial poverty. The debate between socialists and classical economists was over how this should be done. But no one I am aware suggested the factory workers were flourishing. Phelps seems here simply more insensitive to the sufferings of the poor than economists across the political spectrum. But this is in accord with his philosophy: he does not value empathy, community, service, and security.
For Phelps' argument to work, innovation must also have declined since the the early seventies, when regulations began to really grow in America. But this runs against intuitions that seem widely shared across the political spectrum. The Information Age economy has seen an explosion of innovation: cell phones, faxes, computers, the Internet; innovations in wind, solar, nuclear, and biomass; innovations in design, in city planning, in music, and in virtually every field of human endeavor. Phelps ignores the work of Peter Drucker on the rise of the knowledge economy; of Richard Florida on the rise of the creative economy. Scores of sociologists, economists, and management thinkers have written exhaustively on the explosion of innovation and creativity of the information economy. Phelps also ignores more recent developments in mass innovation: crowdsourcing, distributed science, learning through games, etc. Again, his thesis necessitates that innovation has declined, because government regulation has gone up. But his observations of declining innovation seem deeply counter-intuitive.
And he does not really acknowledge the how high the bar he attempting to cross has been set. Instead, he tries to link increases in innovation to productivity growth, as if creativity always increases productivity. Far from it, the eminent management philosopher, Henry Mintzberg, goes so far as to suggests that if a company wants innovation they should be less efficient. Similarly, if you want to write a novel, you do not increase the hours of your work week, but rather live off of accumulated capital. While Phelps might place innovation at the center of his model of the good life and of economic development, he does not really seem to get creativity. Rather, the innovation he speaks of is that of a floor manager being pushed to reduced costs through a better system of tracking merchandise. But this is precisely the sort of innovation which does the least to nurture the development of human capabilities.
Phelps also ignores the massive role government investment has played in spurring innovation. Without government investment, there would have been no cell phones, no Internet, no touch-screen, no GPS tracking, no nuclear power, little solar, wind, and biomass. A devastating review along these lines was published by The Breakthrough Institute [...]. The failure to acknowledge the extent of government involvement in breakthrough innovations is alone enough to negate Phelps' thesis. If the most breakthrough technologies are being funded with government dollars, it is not the private sector which spurs innovation but rather the public sector. Innovation would be thus much more deeply interfused with a public spirit and thus "traditional values," as defined by Phelps.
Similarly, Phelps ignores the fact that the number of patents per capita is highly correlated with income equality, as reported in Wilkinson and Picket, "The Spirit Level." In short, the higher the level of economic equality, the higher the number of patents per capita. Thus, countries like Sweden, Finland, and Denmark produce the most patents per capita, while countries like the U.S. and the U.K., which have high levels of inequality, produce the least. While there are many ways of bringing about economic equality, the most common is through government redistribution. Again, government involvement produces more innovation.
Phelps draws a distinction between socialist, corporatist, and capitalist states. This distinction is at the core of his thesis. But his grouping is counter-intuitive. He places the social-democracies of post-war Europe in the same class as the fascist regimes of Nazi Germany and Mussolini's Italy. He portrays Nazi Germany as having socialist roots, in spite of the fact that the party came to power in contradistinction to the communists, which they regularly fought in bar room brawls and gang wars. He ignores the fact that most socialists were purged from the Nazi Party early on, communists were some of the first people thrown into the concentration camps, and the fact that most historians, outside of American conservative think-tanks treat the use of the word socialism in "national socialism" as an act of propaganda. In spite of all this, he places these fascist parties in the same camp as the social democracies of post-war Europe. Yet, he somehow fails to include Denmark and Sweden in this group, in spite of the fact that the emergence of the welfare-state in these countries involved an epic consensus amongst these three groups. The problem with including them in the dreaded corporatist category is that they score quite well on numerous social and macro-economic indicators, thus suggesting higher levels of productivity and innovation in the sort of economy he wants to avoid. This failure seems intellectually insincere. Similarly, Phelps refers to the communist regimes of Russia and China as socialist. His terminology in these distinctions suggests an activist mind, tarring those governments he does not like with the dreaded "corporatist" designation and mixing up communism and socialism, in spite of a long tradition of distinguishing between the two. You can either play the role of ideological activist or Nobel Laureate economist. The latter status seems incompatible with this sort of categorical framing.
Amazon still awaits a review that examines the economic prescriptions in Mass Flourishing. While I am reasonably versed in this area, I am not up for taking on the economic prescriptions of a Nobel Laureate. The economic reasoning of Phelps is subtle and interesting, but I simply could not give his prescriptions the attention they otherwise would have deserved, for I could not trust the broad set of assumptions upon which they rested. Instead, I continually sensed that half-baked arguments were being used to justify a set of highly counter-intuitive arguments, which arose from his own personal politics. A string of deep ideas and policy prescriptions strung together into an ideology is not enough to make a classic. To be a classic, more of those ideas must correspond with what we know of the real world and human nature.
But perhaps I have sold this work short. It is a highly ambitious work, the kind more economists should attempt. And it is a profound exploration of the way economic policies are internalized psychologically. Personally, I hated the book, but I will probably read it again. I am curious how Phelps might respond to the above criticisms. I have found no reviews that engage his deeper project philosophically. Is it too much to ask of a Nobel Laureate that they answer for their work on Amazon. While it may not be efficient to do so, it would challenge us all to think more deeply and to more seriously engage the work. It is precisely this sort of engagement that the new economy, which Phelps finds so problematic, does such a good job of inspiring. High school students may lack the concentration to get through Shakespeare's Julius Ceasar, but neither are we cowed by titles. Grandiose ideas, with little basis in reality, seldom go unchallenged today, and this is bringing little explosions in every field of learning. How could Phelps have missed the rumbling underneath his own feet? Perhaps it is precisely the ground moving under his feet, which has been spurred by innovations in every field of human endeavor, that inspired him to write such a backward-looking work on innovation. Perhaps it is the bursts of innovation that have caused so many to seek the security of so-called traditional values. Perhaps it is the revolution in innovations that has made us so inefficient. Perhaps it is the vast array of innovations in sports, leisure, and creative expression that have made us so prone to the avoidance of work.
on September 4, 2015
An excellent discussion of how America once was the world's leader in innovation and entrepreneurship and since has slipped. Phelps writes unusually well, and combines insights from economics and literature in a way that few economists can. The only shortcoming of the book is that, at least to me, it fails to provide a convincing set of policy recommendations for lifting our growth rate and our spirits. I look forward to seeing that agenda in Phelps' future writings.
on December 13, 2014
The below is a review of the CD audiobook version of this work (not the audible version)
This book has a number of very serious problems. First and foremost, the book is primarily about the topic of economic "dynamism" and the very important role it plays in economic growth and development yet the author, Dr. Phelps, does not even define what it is. He also posits that it has been decreased economic dynamism that has been responsible for the woes of Western economies since the 1970s. He claims that this has been for a number of reasons. Some of these include decreased incentives for individuals stemming from progressive taxation, greater regulation, increased bureaucratization of the decision making process (a la Joseph Schumpeter's views put forth in Capitalism, Socialism and Democracy), a greater veto process created in the political sphere due to the ability of special interests to veto threatening innovation, and related to this increased corporatism in society, decreased levels of creativity and the supposed greater desire of individuals to work in more secure environments (large corporations instead of small) and fields such as finance.
Two problems here. The first involves his contention that innovative "dynamism" has decreased between the period of the 1950s and 1960s, on the one hand, and the 1970s through today, on the other. On what basis does he even make this proposition? Has technological innovation, in say the form of patents or new processes and intellectual property decreased? Has firm creation and turnover decreased? Has new product development and turnover decreased? Has job turnover decreased? Dr. Phelp's hypothesis implies decreases in all of these yet, if anything, quite the opposite has happened. Hence he does not support his contention that there has been decreased economic "dynamism" between these time periods.
The second problem is that some (but not all) of the reasons he cites for the decrease in dynamism do not conform to reality. For example, as previously stated, one of the reasons that he puts forth for the decreased levels of economic "dynamism" are the decreased economic incentives posed by high levels of progressive taxation. Yet the highest tax rates in many of the most developed nations have either fallen or, at worst, remained stable since the early 1980s. In England and the US, for example, the highest personal income tax rates have fallen from approximately 90% to about one-third. If greater economic incentives were what was needed for increased economic "dynamism" in Dr. Phelp's framework there should have been an explosion, not the decrease he posits.
Very importantly and in addition, he makes no mention of what one would expect to be a very important source of economic and technological "dynamism" - the base of scientific and other knowledge in society, per se. This has exploded over the past 40 years yet is not even mentioned in this book. One would think that this, in and by itself, would have played a very important role in economic dynamism. Yet he does not even mention it in his framework.
Another major topic of the book is the relationship that Dr. Phelp's claims exists between economic "dynamism" and job satisfaction. He puts forward the hypothesis that they are positively correlated. Hence the significant and major decrease in job satisfaction in nearly all major developed economic nations since the 1970s being due, in his opinion, to decreased economic "dynamism". Yet, as stated earlier, if anything it is very difficult to put forth the claim that economic "dynamism" has been on the decrease since the 1970s. Firm and job turnover have increased, as have product development and the pace of scientific knowledge and discovery (as well as the base of all human knowledge). If anything the level of "dynamism" has increased. Yet this has not led to the increase in job satisfaction that he predicts but to the opposite.
Still another problem with the book is that it is supposedly written for a lay audience but because it does not adequately discuss some of the thinkers' ideas examined it of limited value to such an audience. For example he mentions Joseph Schumpeter's belief that capitalism only has a limited amount of time left (Dr. Phelps says this explicitly) but does not state the reasoning behind this. That is that increasing bureaucratization of decision making in business, due to increasing the increasing size of business firms, leads to reduced initiative and hence decreased entrepreneurism. Dr. Phelps does the same with respect to many other economic thinkers such as Keynes, Hayek and Mancur Olson, among many others. Hence the reader can justifiably ask the question of who, exactly, this book is geared towards (even though it is supposed to be geared to laymen). Laymen would not have the necessary backgrounds with respect to these thinkers to follow Dr. Phelps and those more knowledgeable in the field of economics (i.e., economics majors) would already know this and hence gain nothing.
Yet another problem with the book is the fact that it is very disjointed and disorganized. It jumps around every few pages from topic to topic in a schizophrenic manner. The book should have been organized by topic or in some chronological manner.
The book also suffers from many contradictions. For example Dr. Phelps criticizes the role of the state in economic dynamism and claims that it decreases it. He puts forth the view, very justifiable, that private funding is best able to produce economic dynamism. Yet, simultaneously, he believes that the state should set up government financed "angel" investment funds to finance technologies that increase dynamisms.
On the positive side, the book does describe well the development of corporatism throughout the last century. This discussion, though, also has problems. For example, he ignores the role that the state has played in the 20th century, especially via defense related spending, has played in the development of many important technologies such as the jet engine, the transistor and the silicone chip and radio wave transmission technology, among others.
In short, this book is filled with many poorly supported views and propositions. An extremely disappointing coming from a Nobel Prize winner. This reviewer was quite shocked as to how the Financial Times could have considered this one of the best books on economics in 2013. As if all this was not bad enough, the audiobook is quite bad. It is extremely monotone and sounds as if read by a computer. This reviewer has listened to dozens of audiobooks and can state unequivocally that this is one of the worst he has ever listened to. All the more considering the fact that it is about 15 and a half hours in length. This makes the audiobook all the more a living hell to go through.
on November 15, 2014
Phelp's contribution to economics is tremendous and the ideas in the book follow suit. However, writing is not Phelp's forte; this was a slog to read. Brisk prose is difficult to write and I found myself frustrated as I read. It's dense and episodic; 100 pages in, I found myself asking, "When are we going to get to how mass flourishing actually works?!" I would only recommend this book to hardcore economics enthusiasts or academics. If not, I'd get the cliff notes.
Mass flourishing, per Phelps, derives from broad involvement of people in the conception, development, and spread of new methods and products. Governments must reverse losses of prosperity through legislative and regulatory initiatives that boost innovation. His rationale is derived from the prosperity that arose in the 19th century Industrial Revolution, aided by the emancipation of women. Phelps also contends his interpretation is not the classic Schumpeterian focus on entrepreneurs jumping to obvious innovations suggested by scientists, rather driven by broader-based ideas from entrepreneurs and financiers. Traditional values - putting community and state over the individual, along with protection against unemployment, were so powerful that few modern economies made much headway in that manner.
Ancient Greece and Rome made some innovations - water mills, paved roads, bronze castings, and aqueducts, yet eight centuries after Aristotle brought only a dearth of innovation. The Renaissance then brought important discoveries in science and art, and brought riches to royalty. Yet, gains in overall economic knowledge was too meager to elevate the productivity and living standards of ordinary people. Those economies had not acquired institutions and attitudes that would enable and encourage attempts at innovation. Commerce did spread within each country and foreign trade also spread. By the 18th century, especially in Britain and Scotland, most people were producing goods for 'the market' rather than for their families. The heroic spirit, however, sought outlets in military ventures rather than big leaps in business.
Output/worker in England did not increase between 1500 and 1800, though population did increase enormously. Real wages in 1800 were higher than in 1300, but lower than 1200 - thus, it is safe to simply conclude England saw little wage progress from the Middle Ages through the Enlightenment. Output/person then began a sustained climb in 1815, tripling, along with real wages, in less than a century. Phelps, however, contends that advances in science could not have been the driving force, given that some nations advanced much faster than others.
Nearly all the inventors were not trained scientists, nor were they even particularly well educated - Arkwright (water-powered spinning frame) was a wig-maker, Hargreaves (water-powered spinning frame) was a humble weaver, Stephenson (steam-powered locomotive) was virtually illiterate. Watt (steam engine), an engineer, was the exception. These inventions were born out of perceptions of business needs or a sense of what businesses and consumers would like to have - even in the instance of the steam engine, Boulton, Watts' partner, demanded that it be widely useful. Thus, those economies brought ordinary people to flourish.
While the growth rate of productivity in an economy is no indicator of its own level of innovation (copy-cats can do quite well), with few exceptions, economies with productivity levels at or near the top owe that position to a high level of innovation. There also needs to be sufficient agricultural prosperity to allow savings, population linkages and trade to provide markets justifying large-scale production.
Socialism and corporatism (a hybrid approach combining private ownership with heavy labor representation and some management by the public sector) are seen as enemies of the modern economy. Today, CEOs emphasizing the short run, a 'congressional-banking complex,' and mutual funds also with short-term focus and lacking specialized knowledge about individual corporations have brought our deterioration in productivity growth, job creation, and business births. An explosion of regulations (eg. U.S. government suit against Boeing for opening a plant in a 'right-to-work state), grants (the Human Genome project?), loans, guarantees, taxes, deductions, carve-outs, and patent extensions now mainly serve vested interests and political clients.
This is all interesting, but ignores six major conflicting facts: 1)'Socialism with Chinese characteristics' has been beating American enterprises to a pulp for the last two decades. 2)It is hard for American innovation to widely benefit the economy when so many of its fruits are simply given to Mexico, China, and other nations to mass produce and refine - think Apple, flat-screen TVs, mobile phones, etc. 3)A further problem with outsourcing production from the U.S. is that the reduced involvement of skilled Americans makes innovation less likely. 4)U.S. government has played an important contributory role in further innovation - eg. funding the human genome project, development of the Internet, advances in military hardware, our interstate highways, drug company research, etc. 5)Inept and insufficient regulation was the primary factor that brought us the recent Great Recession, as well as allowing health care providers to create the world's most expensive health care system, by far, while largely ignoring about 15% of the population and providing often poor care to everyone. 6)Tax reductions in the Bush administration brought massive deficits, further boosted by Great Recession - also during that administration.
on October 15, 2015
It is extraordinary for a Nobel-winning mind to take the time to communicate complex issues in a manner accessible to people with less training and less time for consideration. Phelps manages to show clearly the root enablers and inhibitors of a society's prosperity -- and to connect this demonstration to policy alternatives, both helpful and hurtful. It is an essential read for anyone who wants to consider themselves an informed voter.
Professor Phelps divides economies into three categories -- modern capitalist, socialist, and corporatist. He argues that the modern capitalist variety is superior to both the socialist and corporatist variety, both by the measure of promoting labor force participation and by the measure of reported job satisfaction and life satisfaction.
So far, so good. Even if, as Professor Phelps writes, "over the years, more and more in the general public came to be persuaded by the arguments of Mises and Hayek against the socialist economy," it can only help to have the arguments restated anew, and supplemented, by an economist with the stature of Professor Phelps, a Nobel laureate who teaches at Columbia.
Things get even more interesting when Professor Phelps tries to trace what he sees as a decline in modern capitalism beginning as early as the mid-1960s and continuing through the present day. One suspect is what the author calls the "new corporatism": "Regulations of industries are instituted, aimed at shielding companies or workforces from competition. ...Shakedowns of companies by communities, nonprofits, or governments extract donations or other accommodations....The new corporatist economy, then, is pervaded by fears of holdups by the government, by stakeholders, by organized labor, and by an ocean of persons and companies ready to litigate."
Professor Phelps decries the influence of what he calls a culture of entitlement. "Many academics, once researchers endlessly testing ideas, now rate themselves so highly that they pontificate with no research at all," he writes (take that, Professor Krugman). "The growing sense of entitlement helps explain the ever-rising outlays for the safety net, which, in artificially raising economic independence beyond what people's private wealth would provide, makes it harder to obtain employee loyalty and employee engagement. The attitude of entitlement can only make it harder for a start-up firm to obtain employees who take the initiative, give a hand to others, and lend the concentration and judgment on which success importantly depends."
The author is on thinner ice, in my view, when he asserts that "wealth competes with innovation seeking." He writes that, "given the monetary rewards, more and more able and talented young people chose to go into the financial sector, rather than into the business sector." He writes, "few would deny that lives or earning and wealth accumulation do not offer the gratification and pride that lives of creation and innovation offer." But that is a false dichotomy. Which sector, "financial" or "business," is Warren Buffett in? Which sector is a partner in a Silicon Valley venture capital firm in? At the very very top, anyway, the monetary rewards are richer for technology entrepreneurs than for investment bankers.
Also unconvincing, in my view, is Professor Phelps's claim that "the resurgence of family values" has "drained companies of some of their innovative spirit." And his claim that "more and more people accept the positions taken by their political party or religion or friends rather than working out their own positions. It would be surprising if this conformity did not weigh on innovation in the business economy." If anything data show that since the 1960s in the United States political party affiliations have eroded, and independent thinking and individual choice in both politics and religion is on the rise.
As for the author's claim that "family values" are somehow at odds with commercial success or economic growth, the best counterargument is his own acknowledgements section, the first sentence of which counts among his "many advantages" in his career his "parents" and "a happy marriage with my wife Viviana."