Princeton University Press, 2013,
392 pp., $29.95
With his latest book, Mass Flourishing, Edmund Phelps, 2006 winner of the Nobel Prize in Economic Science, turns his attention to the economic and psychic state of the nation. As befits a man who in spring 2013 organized a conference on the ties between economics and the writings of Søren Kierkegaard, Phelps has written a book that transcends the materialist walls of standard economics. He argues that the United States has been reduced over the past decades both in its capacity to produce material abundance and in the opportunity for self-realization it offers its citizens. America has become a more static place in every dimension. It may still be the most dynamic country on Earth, but that’s more the fault of the competition. While Phelps places much blame at the feet of government, Mass Flourishing is no libertarian treatise equating happiness with small government. Indeed, it is a book J.M. Keynes would have admired because it deploys that combination of history, philosophy, and quantitative analysis Keynes identified as the formula for great economics.Mass Flourishing begins with an economic history of the West since 1800, which Phelps, like others, identifies as the outset of the modern age. The modern economy, as he sees it, is one characterized by “a considerable degree of dynamism, the will and the capacity and aspiration to innovate.” Economic dynamism is more than mere growth, which can come from any number of sources. It is “a compound of deep set forces and facilities behind innovation: the drive to change things and the talent to do it.” The truly modern economy is ever in a state of disquieting, constant flux. New products displace old products, new firms displace old firms, occupations that once offered a good livelihood disappear. There is always something new. This was the environment of the period now called the Industrial Revolution, which Phelps sees as an upbeat and optimistic time. It was Emma Griffin’s dawn of liberty, not E.P. Thompson’s march into working-class drudgery.The needle’s eye through which Phelps’s reader must pass is his reinterpretation—or more accurately, his disavowal—of Joseph Schumpeter’s model regarding the spread of technological change over the past 200 years. Schumpeter, whose Theory of Economic Development has been the standard reading on this topic, saw novelty as a gift handed down from the scientist to the entrepreneur, whose role it was then to find its application in business and to supervise the famous creative destruction that drives change. Phelps argues that while Schumpeter got the rhythm and perhaps the key right, he messed up the order of the notes. In other words, in Phelps’s view Schumpeter’s model is too narrow, and he replaces it with a broader, more compelling narrative.His definition of innovation encompasses more than just scientific progress, but, more importantly, he reverses the arrow of causation. Business, by his reading, was not a passive agent, but instead enlisted science to provide the means of achieving its own ends. Progress was not just the consequence of scientific curiosity; it was equally driven by capitalist competition. As has long been argued by those who study the history and sociology of science, “enlightened tinkering” by practical, commercially minded people contributed as much to science as the other way around.This is a more powerful conception than Schumpeter’s, and it is more consistent with the picture of late 18th-century England that emerges from works like Jenny Uglow’s The Lunar Men (2003). The competition among manufacturers like Matthew Boulton and Josiah Wedgwood to provide new products, and to reap the profits they would yield, led them both to promote science and to advocate public investment in roads and canals. Modernism, as Phelps interprets it, was an idea whose time had come, and it enlisted business, science, and the state as its instruments.In suggesting that innovation is endemic to capitalist competition, Phelps offers a new reading of history, one whose importance is easily overlooked. To contrast the two views, consider the fact that in the year 1800, European living standards had been essentially unchanged since the birth of Christ—nearly 2,000 years of stasis. Within the next 150 years, the world was made new. What happened? Schumpeter would have to respond that the accumulation of scientific knowledge, more or less accidental at first, more systematic as time passed, finally brought modern commercial technology into being. Phelps’s response is to weave strands of thought regarding the value of the individual life and the fulfillment that an individual could rightfully expect on earth, ideas which had been developing in Europe since the Renaissance, into the Gestalt that sired the modern capitalist economy. From there, business both nurtured and harnessed science to deliver the modern world.While they are in every other way divergent, Phelps’s views here have much in common with those of Karl Polanyi, who argued in The Great Transformation (1944) that the utility-maximizing man of economic theory was an invention of the 18th century. Polanyi lamented the changes that followed, being more inclined to Gemeinschaft than to Gesellschaft; Phelps celebrates them, not just for their material consequences but also for their broader cultural ones.Once one accepts the idea that capitalism creates innovation rather than feeds upon it, several things become clear. It explains why writers like Deron Acemoglu and James Robinson find that countries with more inclusive institutions, irrespective of any other advantages or handicaps they might have, consistently have better records of long-term economic growth. It is because the inclusive countries enlist a larger share of the national IQ, so to speak, into the scramble for innovation.It also helps us to understand why the socialist dream of a technologically advanced economy under centralized direction is a mirage that will forever be one five-year plan away. State research institutes are fine, and the Soviet experience suggests they can even do some good work. But the belief that they can be bolted onto an uncompetitive economy that will then become dynamic rests upon a misreading of history. In this regard, the European Union has had on its drawing board a plan for a European MIT, which its promoters think will revitalize Europe’s flagging dynamism. If Phelps is right, the Europeans will need other reforms before such an institute will make an impact.Sometime around 1800, a critical mass was achieved, innovation took over, and human history changed in ways no one could have imagined. The ordinary man in the next 150 years achieved a lifestyle that had heretofore been reserved for princes. According to data gathered by Angus Maddison, the average Briton in 1950 lived twice as long and enjoyed a living standard four times as high as his counterpart of 1800. The average North American’s real income rose by a factor of seven, and the average European, starting from a higher base, by a factor of four. Most European countries partook of the benefits of the modern economy, as did most Europeans. Industrial wages in most countries rose as fast or faster than national income. The material benefits of the modern economy transformed the life of the average person. She was healthier, had more leisure, enjoyed a richer cultural life, and occupied herself with different thoughts than her ancestors of even a few generations prior. Not all countries became equally modern and some were not modern at all. The hallmark of modernity is innovation and change, not just growth. Italy, Spain, and, later, Japan enjoyed decades of growth in both income and productivity without ever developing the institutions needed to support endogenous innovation. The reasons they could do this varied from country to country, but the more successful were at least vibrant enough to copy the others. Even the Soviet Union turned in some impressive decades by belatedly installing electricity and improving communications.Vast though the improvements might have been, it didn’t take long for modernity’s adversaries to find their voice—since nothing creates discontent as well as progress. Phelps joins Hayek and other thinkers in identifying the two main rationalist doctrines, socialism and corporatism, as the enemies of the modern economy.The belief that the future can be planned in advance and then enacted through prescriptive legislation gained adherents for a variety of reasons. Ludwig von Mises’s dissection of socialism stands among the intellectual documents of the 20th century. He not only forecast the failure of socialism but articulated the exact reasons it would fail. Nonetheless, it took seventy years of real-time experiments and some 100 million deaths finally to consign socialism to history’s dustbin.Corporatism, however, lives on. Its adherents have tended to be nationalists who were tired of relentless flux and yearned for a national purpose and a sense of community that would replace money-grubbing individualism. Corporatism’s first full flowering was the Italy of Benito Mussolini. The Syndical Laws of 1926 forced all businesses into one of 22 groups, which became government-sanctioned cartels. Workers in each group were represented by a single union, and crucial issues like prices and wages were decided by negotiation between the union and the industry association. Mussolini’s government played referee, and when agreement was beyond reach, it arbitrated. Mussolini had to become more assertive over time, but his plan did bring order to what had been an economy in chaos. Starting a new business was devilishly difficult, and any thought of Schumpeter’s creative destruction was lost, but it did create the appearance of order. Prior to his foreign adventures of 1935, Mussolini became something of a hero among those who thought modernity meant rationalism rather than spontaneous order. Some number of Mussolini’s admirers must have been in the Roosevelt Administration, because its National Recovery Act of 1933 looked like a direct Italian import. It designated team leaders for each industry and established codes for setting prices, wages, and output levels. The Supreme Court found it unconstitutional in 1935, but that was before the “switch in time that saved nine.” The Supreme Court of Brandeis and Frankfurter subsequently lowered the barriers to prescriptive regulation.Corporatism survived the war and became the guiding spirit of Europe’s “social market” experiments. It made slower progress in the United States, but Phelps argues that by 1970 this country was ready for a second transformation, following the Great Transformation of the 19th century. “The first incarnation of modern capitalism did not entail zero government. It could and did operate alongside activist government. . . . But while government, of necessity, was making basic judgments in the political sphere, there was a private sphere in which individuals made the final decision.” He goes on: “The second transformation has injected a tacit and finely articulated form of corporatism into the American economy. [The new corporatism] created a parallel economy that competes with the market economy and is another source of risk, scaring off innovation.”Here is the heart of the Phelps analysis. Competition and the liberal environment in which it thrives are essential to the innovation that both brings prosperity and makes work engaging. Nations may be beguiled by corporatism into thinking they can trade a modest reduction in GDP growth for a more orderly and more just society, but they underestimate the consequences. The corporate state means slower wage growth, more inequality, less inclusiveness, less job satisfaction, and a life of drabness. In the end, it doesn’t even deliver justice in the sense in which John Rawls used the word. Phelps supports each of these charges with a fair amount of data, some of which will be beyond the untrained reader. But plenty of this section is accessible enough to convey the message.Still, strong books draw strong reactions, and Phelps is bound to have his share of critics. Modern corporatism has many articulate defenders, all of whom will see this book as a threat. One obvious line of attack is to reduce Phelps’s argument to a disagreement over the trend of labor force productivity, and to suggest that Phelps is hyperventilating over something that in retrospect will be seen as a temporary slowdown. Paul Krugman, himself a distinguished economist, has recently argued along these lines, asserting that productivity growth was robust as late as 2007 and that it will regain its upward path once the effects of the long recession are behind us. Certain information scientists go even further. Erik Brynjolfsson and Andrew McAfee have recently asserted that most of the productivity gains from technology are still unrealized, and that the best is yet to come.This might well be true, and were productivity to regain its momentum Phelps’s argument would lose some of its sting. But it is equally true that the facts as we now know them overwhelmingly support it. Aside from the evidence Phelps provides directly, Robert Gordon, the nation’s great authority on labor productivity, has assembled a considerable body of evidence that productivity has been losing ground not since 2007 but for decades. In a recent discussion of the economy’s disappointing recovery from the last recession, Larry Summers notes that were it not for the housing bubble, the United States would not be in its fifth year of sub-par performance; it would be in the fifteenth year.Another tack Phelps’s critics might take is to suggest that, despite its humanist flavor, his argument is too narrow. He’s a better economist than he is a sociologist, and he has missed a displacement of innovative activity into a purely social domain, where it isn’t easily captured by the data hunters. This is a version of what Gordon refers to as the last best hope of the optimists. Its strong and its weak points are one and the same. It makes for interesting conversation over cocktails, and it can never be disproved. Not everyone will agree with Phelps, but the thrust of his argument will not be easily deflected. Mass Flourishing was written with a serious intellectual intent and by strictly scholarly means, but it will also serve as great propaganda, putting powerful words into the mouths of the disaffected. One can expect to hear a good bit about dynamism and national rebirth in the next presidential election campaign.As to Phelps’s own prescription for excising the rot, its strong point is that it is truly nonpartisan. He condemns Republicans and Democrats alike. He also advances several proposals that could be enacted and that would help, like a rework of banking regulation to get banks out of the business of trading government bonds and into the business of supporting new ventures. He has also proposed a national bank to finance new businesses, along the lines of the Federal Farm Credit Bank. The core of his program, however, is so radical that it would require decades of fighting to enact, if it could be enacted at all in the face of fundamental confusion over what works economically and why.Large parts of the electorate associate rationalism with good government. Isn’t scientific government modern? Phelps’s response is a resounding “no.” One of his less ambitious measures, which would require only one amendment to the Constitution, would be a Congress comprised of individuals who have done something with their lives other than practice law or connive in politics. They would come from professions in which they had experienced competition first hand and had been forced to innovate, and they would return to those professions after a finite period of public service.More generally, he calls for a reconstruction of the nation’s regulatory apparatus with “organic dynamism” as its operating principle. He writes as though the idea is uncontroversial: “It is not an ordered system: It is turned topsy-turvy by homegrown innovation and the crazy scramble to create innovation.”Exactly how one is supposed to get a politician to go on national television and advocate the topsy-turvy, Phelps doesn’t say. But the role of a Nobel Prize winner is less to write a nation’s law than to define its aspirations. That is what Edmund Phelps is doing.