Edmund Phelps, the Columbia University economist who won a Nobel Prize for his convincing explanation of why the rate of inflation will always be a moving target for policymakers, is back with more bad news. In the long run, he argues, the growth (and health) of an economic culture doesnaEUR(TM)t depend on incentives to work or save, or the efficiency of markets, or effective macroeconomic intervention or even the quality of education, but on societyaEUR(TM)s openness to innovation. And for reasons he outlines in brilliant detail in his new book, Mass Flourishing, the rich industrialized states have lost their mojo. And did I mention, he really doesnaEUR(TM)t know how we could get it back?
IaEUR(TM)ve been thinking a lot about Mass Flourishing because I had the opportunity to interview Phelps at a recent joint Milken Institute-Rand Corporation event. (YouaEUR(TM)ll soon be able to watch the video on the Milken Institute website if you want a taste in living color.) Phelps argues that Western Europe and the United States enjoyed a golden age in which innovation aEUR" artistic and social as well as economic aEUR" that led to rapid growth and, equally important, the opportunity for individuals to lead fulfilling lives through creativity and personal growth.
But all was not well in Eden: The price of economic and social dynamism was uncertainty in the form crashes and bubbles, big losers as well as big winners. One reaction was top-down socialism which, after initial successes in Russia and China, was revealed as a ticket to economic stagnation and totalitarianism. The other was corporatism, in which business, government and organized labor circumvented market forces in order to stabilize employment and profits. It started in MussoliniaEUR(TM)s Italy and HitleraEUR(TM)s Germany, and was echoed (minus the fascist ideology) in AmericaaEUR(TM)s New Deal. But itaEUR(TM)s more or less hung on despite the bad political odor because it serves the interests of many. Trouble is, says Phelps, it is fundamentally incompatible with the dynamism needed for an economy/society to truly flourish.
So, there must be a chapter at the end of the book that explains how we can dig our way back into the Garden, right? Yes, but itaEUR(TM)s unconvincing hand-waving: corporatism is a mighty force to be reckoned with.
I donaEUR(TM)t buy the thesis at face value. But thereaEUR(TM)s no doubt that Mass Flourishing belongs on a very short list of smart, provocative explanations of everything that are really worth reading. Best of all, it is written in highly literate English, rather than the babble economists generally use to disguise the limitations of their ideas. As we used to say on book report day in 4th grade, I recommend it for both the boys and the girls in the class.