Right Values and Wrong Ones for an Economy of Dynamism
2006 Nobel Laureate in Economics
Director of the Center on Capitalism and Society
We will not be able to regain the dynamism of old unless we restore the modernist values and reject the post-modern ones.
While the past two years have brought many disruptions, it has also brought opportunities for change. A problem that persists in the West is that the lead countries are suffering from a loss of the old mojo – a loss of their former drive. There has been a significant loss of the modernist spirit, which stirred powerfully in late-Renaissance Italy and Germany (late 15th and 16th century) – think of Pico della Mirandola, Luther and Cellini – and reached a “critical mass” in the 19th century: first in Britain and America, later in Germany and France.
I think of this “modernist spirit” as composed of several modern values. One is individualism – thinking for yourself, willing to break from convention, and a Dickensian desire to “take control of your life.” The second is vitalism – having the Shakespearian courage to act, the Nietzschean will to surmount obstacles, and, in Lincoln’s words, a “rage” for the new. The last is expressionism – exercising the imagination that Hume speaks of, exploring or experimenting, thus voyaging into the unknown. Modern people have a fascination for uncertainty.
It was the ultimate birth of this modern spirit – in the nations fortunate to have it – that fueled dynamism, by which I mean a desire and a capacity to innovate. This dynamism sparked the explosions of innovation in the 19th century – and this innovation became the engine fueling business investment. (Of course, even a person or a nation possessing the utmost dynamism may fail to achieve the innovation they sought.)
This hypothesis is tested in my book Dynamism. The book reports cross-country evidence from data on countries in the OECD that the degree of modernism, as measured by various attitudes and beliefs, is strongly correlated with the degree of economic performance, as measured by job satisfaction, labor force participation etc.
It will not surprise you that I believe it is a substantial loss of that modernist spirit, thus some loss of dynamism, that has largely led to much lower rates of innovation starting around the late 1960s. (The years of the internet boom were a welcome respite, of course, and the Bush-Greenspan housing boom was not much of a respite and not welcome.) The losses of innovation appear to be located in the traditional industries. The innovation we do have appears to be concentrated in new, high-tech industries – in fact, just a few celebrated corporations and, recently, even they seem to have lost some of their impact on productivity.
Furthermore, in my book Mass Flourishing, I provide some evidence that innovation in the 19th century was also pervasive – in all or most industries – and inclusive – from the grassroots of society on up. Much, perhaps most, of the contribution by innovation to economic growth can be laid to the new ideas of ordinary people engaged in business life. The work they did every day led them to conceive of some better or different methods in farms, factories and offices – though they must have been aware that commercial success was uncertain.
Now, it also appears to me, there is a dread of “Knightian” uncertainty (named after Frank Knight – Keynes also introduced the concept in A Treatise on Probability in 1921). People came to be uncomfortable with the directionlessness that modernist values injected into the economy. This loss of their former fascination with voyaging into the unknown – which is an element of expressionism – is one of the causes of the serious loss of dynamism, thus a serious loss of innovation. (This does not mean that innovation has disappeared entirely.)
Some of us believe there has also been a decline of individualism. Where are the Horatio Alger stories? Where are the young people asking Horace Greeleys in what direction to go? I am shocked that young people say in opinion surveys that they want to remain in their hometown, live close to their friends or even continue to live at home! This is a portrait of America that is almost unrecognizable to me. Certainly it is not the nation that Norman Rockwell painted and Willa Cather wrote about.
How about vitalism? Are Americans still OK on that score? I am not sure. I wonder, are Americans still do-ers? Do they love to compete as much as in the decades from, say, the 1850s up to the mid-1960s? Or are they still the couch-potatoes that was once said about them? Are they fixed on all the tweets coming in by the hour?
There are other hypotheses on the causes of this stagnation, most of them a reversion to the tenets of corporatism: There is the rise of the “money culture,” as John Dewey called it. There is also the strange love affair of most Americans and Europeans (including Brits) with houses, which is another kind of materialism.
The flagrant short-termism of corporate heads and our representatives in legislatures – witness the 2017 tax cuts proposed in Washington – is another hypothesis. Answering a query from Larry Summers, I looked into what has happened to the steepness of the yield curve since the earliest period to recent periods. The trend has been up. In the period 1925-32, the average 10-year rate was only 0.05 points above the average 3-month rate. In the period 1994-96 it was 1.93, in 2003-2005 and in 2016-17 it was 1.51. These observations are consistent with the hypothesis that asset managers and clients are more averse to long-term assets, with their relatively high element of uncertainty, than they were in the span of normal years in the Interwar period. However, the hypothesized rise of short-termism is not outside my framework of modernist values. It looks to me like a loss of vitalism.
The emergence of abusive use of patents and protectionist regulations is yet another compelling hypothesis. The problems are too well-known to be set out here. I would only make the point that an economy needs some basic patent protection and some basic regulations; however, a forest of regulation and patents makes it burdensome for individuals to start new companies and presents legal hazards to employees and managers inside existing companies who would have liked to try out new methods or policies. Why has society allowed these governmental abuses to arise? In part, my answer is that, much of the citizenry have lost their allegiance to modernist values.
Finally, politicians have taken ad hoc measures that directly block competition from new ideas. The entry of startup firms is impeded through a variety of actions – from tariffs and quotas to outright aid to incumbents – to save established companies from losing market share. Furthermore, when incumbents become safe from firms with new ideas, they can afford to cut back whatever defensive innovation they might have done. All this represents a serious rejection of individualism in favor of collective action.
So we are faced with a revolt against the modern values that once drove massive innovation in the lead economies of the West and a rise of post-modern values that have gradually pointed society toward other ways of life. We will not be able to regain the dynamism of old unless we restore the modernist values and reject the post-modern ones.
Edmund S. Phelps, the 2006 Nobel Laureate in Economics and Director of the Center on Capitalism and Society at Columbia University, is author of Mass Flourishing and co-author of Dynamism. He has written books on growth, unemployment theory, recessions, stagnation, inclusion, rewarding work, dynamism, indigenous innovation and the good economy.