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Mass flourishing: How grassroots innovation created jobs, challenge, and change.

Edmund Phelps earned his deserved fame for his technical analysis of economics. When he won the 2006 Nobel Prize in Economics, the committee specifically cited, among other contributions to macroeconomics, his work on integrating firms' and employees' expectations of inflation into the standard Phillips Curve, thereby showing that "there is no long-run tradeoff between inflation and unemployment, since inflationary expectations will adapt to actual inflation. In the long run, the economy is bound to approach the equilibrium unemployment rate, at which actual and expected inflation collide."

In the last decade or so, Phelps turned his attention to studying the cultural underpinnings of societies--their attitudes and values--and how these affect a society's ability to thrive and innovate. In Mass Flourishing, Phelps writes an important summation of his recent academic work, and does so in a manner engaging to the economist and layman alike.

In Phelps' telling, there is a pronounced conflict between a "modern capitalist" economy and a "corporatist" economy. Modern capitalism is the dynamic, innovative engine that lifted the living standard of all participants beginning in the nineteenth century--"insti-tutions and an economic culture that potentiate conceivers of new commercial ideas, facilitate entrepreneurs to develop these new ideas, ... willing [ness] to invest in or lend to enterprises and consumers (and end-users) willing to try products found in the market" [p. 203].

Whereas the definition of modern capitalism may be well known and understood, the "corporatist" economy is probably less familiar in definition--although easily recognized in practice. Corporatism here does not refer to an incorporated business; rather, it is economic behavior directed by the state or by stakeholders other than the firms or consumers. "Classic corporatism widens government powers ... in order to forge a state-led economy. [It] refers to a set of aims: directedness rather than disorder, solidarity rather than individualism, and social responsibility rather than anti-social behavior. ... The new corporatism also goes beyond the groups of classical corporatism--the groups that may bargain collectively and the groups yoked together in 'concerted action'--by embracing the idea of a social compact ... the new thinking sees the state as undertaking to protect everyone from everyone else--or as close to it as is practicable. Social protection for all is the motto of the new corporatism" [pp. 166-67].

Phelps, however, is no neoclassical liberal or libertarian. "The statement that freedoms are good, notable for the expression of creativity and the achievement of innovation, does not imply that freedoms are good in every case--the overstatement for which the libertarian Ayn Rand became famous. Not all freedoms are good for dynamism" [p. 82]. "The moral of this narrative is not a call for more spending and regulation by the state or more libertarianism . ... It is a call to rehabilitate modem capitalism by clearing away blocks to its dynamism both in societies and in its institutions" [p. 240].

After introducing us to a brief economic history of economic growth, Phelps organizes the book into three parts. He surveys the history of how, historically, even when commerce and trade expanded, output per worker and real wages remained stagnant for centuries. This was mercantilism, and although it provided some gains, these were slight and easily lost. He discusses how the expansion of land and capital in the nineteenth century cannot alone explain more than one-seventh of the rise in output per capita that occurred during that time. Nor can economies of scale account for the rapid rise in modern times. The "near tripling of productivity between 1820 and 1913 in America and Britain" can only be explained by innovation.

After this introduction to what happened, he describes how this unprecedented growth and productivity took place. This first section provides a fascinating narrative on how economists account for and describe--or missed, the importance of innovation. Not surprisingly, Joseph Schumpeter's work looms large. Schumpeter, of "creative destruction" fame, contributed to economics the discussion of how entrepreneurs were necessary to employ new scientific discoveries into an economy. However, Phelps explains how Schumpeter got it wrong by considering all innovation to be exogenous to an economy and solely the product of inquiry into the physical sciences. Contrary to Schumpeter, "the explosions of economic knowledge in the 19th century must be the effect of the emergence of an entirely new kind of economy: a system for the generation of endogenous innovation decade after decade as long as the system continues to function. Only the structure of these economies for the exercise of indigenous creativity and pathways from there to innovation--for what has come to be called 'indigenous innovation'--could have put these nations on steep paths of sustained growth" [p. 14].

In the next section, he sets forth the corporatist enemies of modern capitalism. Phelps brilliantly summarizes the economic debate of early 1900s dominated by the feasibility of socialism. The debate between Ludwig von Mises and Friedrich Hayek on the side of a modern economy against Oskar Lange on the side of socialism figure prominently. Mises and Hayek showed how managers in a socialist economy would always lack the necessary incentives and information to make efficient decisions. Yet, according to Phelps, this debate fell short by failing to account for the values necessary for innovation. If social control is no longer a viable organizing model, then why does corporatism carry on?

Corporatism as we experience it, in Phelps' telling, owes more to the continental European intellectual strands that came together in Benito Mussolini's syndicalism. This form of an economy still resounds with us today because of its emphasis on the community over the individual and the promise of security over "the perils from market competition, the instability of jobs, and the rudderlessness of industry" [p. 150]. In the United States, this corporatism began to grow in the postwar years and manifested itself by firms losing control to outside government oversight, labor unions, and community stakeholders--unlike the socialists, the corporatists found that they could exert control without exercising outright ownership. As with socialism, economic efficiency does not justify this arrangement--it is sustained by values.

In the next section of the book, Phelps takes on corporatism on its own terms and shows how it fails to provide not just economic wellbeing, but the satisfaction and security that a modern capitalist economy provides. Here he draws extensively upon his recent academic research into the relative happiness and fulfillment that the modern economy makes available.

The last section is heavily influenced by John Rawls, the influential twentieth-century philosopher. Rawls postulated that the rules of a just society would be the ones that people would agree to if they operated behind a "veil of ignorance." That is, rules that people would choose if they were in a hypothetical state where they did not know their place in society or their prospects. Phelps sets out to define what constitutes a "good life." Drawing on the history of philosophy, literature, and conceptions of justice, he shows that the modern capitalist economy should be the choice for a just society, a flourishing society--a vital society--and that other choices based on the more pronounced communal values of corporatism would lead to stagnation and the undoing of what we have achieved.

This well-written, wide-ranging, and interesting book should interest business economists.

Derk A. Wilcox

Mackinac Center for Public Policy

By Edmund S. Phelps. 2013. Princeton, NJ: Princeton Press. Pp. 378. $29.95 hardcover.
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Comment:Mass flourishing: How grassroots innovation created jobs, challenge, and change.
Author:Phelps, Edmund S.
Publication:Business Economics
Geographic Code:1USA
Date:Jul 1, 2014
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