Tuesday, May 9, 2017

Phelps on Dynamism vs. Corporatism

Edmund Phelps won the Nobel Prize back in 2006 for work that "[d]eepened our understanding of the relation between short-run and long-run effects of macroeconomic policy." But for the last 10-15 years, he has focused on articulating a broader philosophy and economics of capitalism. His thinking in this area is expressed in his 2014 book, Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change.

But for those looking for a combination of summary of some main themes of the book along with additional thoughts, Phelps has also just written an article, "The Dynamism of Nations:Toward a Theory of Indigenous Innovation Edmund Phelps," in Capitalism and Society (2017, 2: 1, Article #3).

My own gloss on Phelps's argument would go something like this: When standard economics (going back to Schumpeter) considers economic growth, it often follows a cookbook approach in which science creates ideas, engineers apply ideas, and then a business supplied with appropriately skilled workers makes and them. In this vision, most workers are cogs in this machine, motivated solely by their wages and their prospects for consumption of goods and services.

Phelps pushes back against what I'm calling the standard perspective in a number ways. He places less emphasis on the role of science and new discovery for innovation, but correspondingly more emphasis on "business knowledge" or "commercial knowledge" in creating innovations about what to produce and how to produce it. He argues for the importance of having large swaths of the workforce actively involving themselves in this process of business discovery and innovation. He argues on economic grounds that this broader involvement is important for innovation, and on philosophical grounds that many people find a deeper life satisfaction from involvement in creativity and a career.
Finally, he argues that societies provide a more or less hospitable climate to this broader involvement in innovation, in the balance that is struck in any society between the value placed on creativity, innovation, and disruption, and the value placed on material well-being, predictability, and security. He argues that American society has become in a broad sense less hospitable to innovation, at least in most of the industries outside information technology.

Obviously, it's hard to summarize an argument of this breadth in a compact way. But here are a few comments from the article to give a sense of his argument.

On the importance of innovations that are not a direct result of scientific breakthroughs, but rather of business knowledge:
"An encyclopedia of major innovations must be full of new products and methods not triggered by – or even linked to – any particular scientific advance: Fire, wheel, writing, paper, the Egyptians’ steam power, Gutenberg’s printing press, Whitney’s cotton gin, Waltham’s interchangeable parts, Deere’s moldboard plow, Lille’s chlorination of drinking water, Singer’s sewing machine, Pasteur’s persuading surgeons to wash their hands, Edison’s lightbulb and phonograph, Nightingale’s hospital reorganization to contain disease, the Lumière brothers’ commercial films, Marconi’s radio, Sarnoff ’s radio network, Birdseye’s frozen foods, Farnsworth’s television, IBM’s computer (aimed at businesses), Malcolm McLean’s 1956 containerization, Nat Taylor’s 1957 multiplex cinema, Ted Turner’s 24-hour news program, Howard Schultz’s Starbucks, Marc Andreessen’s web browser, etc. Fracking, the latest of the big innovations, depended on the expertise that engineers gained from experience, not some exogenous advance of science. Of course, the total impact of the millions of unrecognized innovations might well exceed that of the many thousands of well-recognized ones such as those just mentioned. 
"We can see how Schumpeter went wrong. Science is not the sole source of all knowledge. While advancing science may be expanding potential knowledge of production possibilities, science does not tell us whether there will be a market for any of the new possibilities; business knowledge is indispensable here. And while the level of general scientific knowledge in the world may well have contributed to innovations achieved in modern economies, the outpouring of new products and methods from the 1820s to the 1960s in some countries may not have resulted from scientific discoveries more than from myriad business discoveries – discoveries made in the tests and try-outs of new business ideas. It is not established that scientific knowledge, S, grew faster than business, or commercial, knowledge, C, or that growth of the former is more effective in bringing economic advance than growth of the latter. (Furthermore, the cumulative level of business knowledge – industry expertise and related know-how – is surely more voluminous.)"
Here's Phelps on the importance of a large number of people with creativity and ingenuity for the process of innovation, and the importance of social support for what Phelps calls "dynamism" rather than for "corporatism" or "solidarity.
"The modern capitalist system offers the latitude to innovate, the capacity to do so and, above all, the desire. For high dynamism, a nation – its families, communities and public offices – must give individuals and their companies the latitude and support they need if they are to attempt and to achieve innovation. There is little leeway for innovation if society is unwilling to put up with the “creative destruction” – even the mild disruption or inconvenience – that may accompany it. And there is wide latitude for the innovator where mayors and other public officials are eager to facilitate start-ups and help them with their development. Patent trolls and a climate of litigation pose daunting hazards for start-ups aiming to innovate. Corporatism comes in here: A dogma of a corporatist society is “solidarity.” It calls for providing “social protection” of the myriad interest groups in the economy. So the government might defend the workers or investors in industries by regulating entry with the purpose of barring outsiders with new ideas. In some industries, companies may operate a cartel that removes incentives to innovate in order to gain market share. Solidarity also requires the gains of enterprises, whether from a change of market conditions or a successful innovation, to be shared with so-called stakeholders. So any enterprise contemplating an attempt at innovation would expect that a substantial profit would be largely turned over to the community or to the state. ...

At the heart of a nation’s system for high dynamism are people with the desire or occasional urge to innovate. Some may have motivations found among entrepreneurs, such as a need to succeed or to strike it rich. Some others, however, may want to make a difference or show they can go their own way. Some are driven by a curiosity to see whether their insights prove right. Still others are motivated by a desire to give something to their community or society. (Obviously the latter attitudes or traits are not the work-and-save mentality of mercantile capitalism.) I would add that, although a person’s desire to innovate may be inborn to a degree, it can be boosted by supportive attitudes of parents and teachers; and it can be repressed by unwelcoming or hostile attitudes toward creativity or novelty. Furthermore, businesspeople will have more desire to innovate in a nation that admires such ventures and provides workforces that will be engaged in the project and want to contribute. These same desires can also be inhibited by repressive attitudes in families and communities. The empirical effects of attitudes and traits on the dynamism of nations have been the subject of much recent research. The paper I presented at the 2006 Conference of the Center on Capitalism and Society in Venice tested the statistical significance of several attitudes reported in the World Values Surveys, and it presented estimates of the efficacy of these attitudes. Economies exhibit better performance in nations in which more people regard work as important to them, want to have some initiative at work, seek jobs that are interesting, express acceptance of competition, and prefer “new ideas” to old ones. These results, which do not address innovation in particular, at least leave open the possibility that innovation is affected by these attitudes. A subsequent study by Gylfi Zoega also using WVS data found that the possession of a good “work ethic”, initiative, and trust of others raises job satisfaction; and these attitudes also affect a nation’s unemployment and labor force participation. Finally, in a study with Raicho Bojilov in 2012, I found that job satisfaction is higher – very likely because innovation is stronger or more widespread – in nations where more people think it is fair to pay more to the more productive, agree that the direction of firms is best left to the owners and feel that new ideas may be worth developing and testing. ...
As one might anticipate from the tone and tenor of this argument, Phelps criticizes an excess of regulations often passed in the name of social protection for hindering creativity. But he saves some of his strongest language for what he calls "private sector decadence" and "corporatism."
Some of the most serious faults of the once-dynamic economies lie in the private sector. A degree of corruption has seeped into some private institutions. The institution known as corporate governance is suspect. Most attempts at innovation are long-term projects shrouded in mystery, yet CEOs lean toward short-termism, aiming to maximize their bonuses and golden parachute by extracting every last gain in efficiency. This short-termism reduces the supply of innovation – the innovatorship, risk-capital, and venturesome end-users that innovation requires. CEOs in established companies make as few attempts at innovation as possible – explaining that there have been no “opportunities” to innovate. Financial people want to be paid on the basis of current profits, with little to no claw-back. The pressure is on corporations to meet quarterly earnings targets so as not to jeopardize hoped-for capital gains on the stock. A characteristic of established and even accomplished corporations is that they are unable to go beyond a careful concern for efficiency, which demonstrates to the corporate board and shareowners their zeal. ... 
In all the discussion of reform, however, it is supposed that it is the “economy” that needs fixing – that the spirit of the modern economy and the values that inspire it remain strong: America remains at heart a nation of pioneers and innovators, Europe the home of mythic explorers and profound discoverers. But the “spirit” is a key part of an economy – the heart of it. The corruption of government and of corporations is not simply the ineluctable consequence of self-interest. People’s self-interests depend on their values. The transmutation of the state and the corporate sector is a result of a resurgence of the traditional values that we call corporatist values, which counter the influence of modern ones. At precisely this level of values, the rise of corporatism has transformed the functioning of the once-modern economies. ...
The corporatism that was resurgent at the turn of the century – the doctrine of Ferdinand Tönnies, George Valois and Benito Mussolini, to name a few – disapproved of disorder, especially the topsy-turvy disorder that came with innovations and adaptations. Corporatism disapproved of those with the ambition to get rich, calling them “money-grubbers,” and hated the “new money” that displaced established wealth. It disapproved of competition, preferring instead the concerted action of society as a whole through the government. Most fundamentally, corporatism was an attack on individualism, calling for a state that would bring harmony and nationalism in place of the individual’s autonomy to take initiative and to innovate.  In the corporatist state, everyone is to go on working, accumulating wealth and managing companies – and all that is seen to be for the good of the social body. But no one is permitted to hire the nation’s labor and borrow its wealth to embark on a venture aimed at adventure, discovery and personal growth! What matters is society’s power to achieve material gains – public consumption, private consumption and leisure. Thus the rebirth of corporatism was a reaction against the modernism that was the root source of the spirit of the modern economy.
By now, corporatism is pervasive in all the nations of the West. Corporatism is behind the metastasis of vested interests, clientelism and cronyism that has brought a welter of regulations, grants, loans, guarantees, deductions, carve-outs, and evergreen patents mainly to serve vested interests, political clients, and cronies. In recent decades, large banks, large companies, and large government agencies formed a nexus to pump up home mortgage debt in America and to create unchecked sovereign debt and unfunded entitlements in several nations in Europe. America has joined Europe in having a parallel economy that draws its nourishment from the ideas of political elites, whatever their motives, rather than from new commercial ideas. All this has combined to choke off much innovation.
Corporatist thinking is behind various developments in the private sector. With the rise of stakeholders, anyone deciding to start an innovative company would have to expect that its property rights would be diluted as it copes with an array of figures – its own workforce, interest groups, advocates, and community representatives – who ardently believe they have a legitimate “stake” in the company’s results. Many employees feel they have the right to hold on to their jobs – no matter that many others would do the job for far less money – so long as they add something to profit or the company makes a profit from other divisions that can cover the loss.

As a reader of Phelps's essay (and the earlier book), there are plenty of places where I feel some urge to push back against his argument.  But it also seems to me that he is trying to enunciate something important. As he notes, standard economics has not produced a fully persuasive answer as to why productivity growth slowed across high-income countries in the early 1970s, or  why male labor force participation started a steady decline at about the same time. There are also plenty of times and places where governments in certain countries liberalized certain laws or opened an industry to competition, but the resulting changes were paltry or nonexistent. The fact base and logical linkages here can feel nebulous and elusive. But in a broad sense, it seems plausible to me that a society can offer a broader climate that is more or less supportive of innovation and change, and in turn, that this climate that this can have deeper effects on growth, work satisfaction, and the efficacy of economic policy.