How do we then make of all this digital innovation? Why is aggregate total factor productivity down when we live in a world of unimaginable possibilities fueled by this digital revolution? Phelps believes that the loss of indigenous innovation in traditional manufacturing and service sectors is not offset by the digital, media and financial industries. The whole Silicon Valley only constitutes a fraction of national income and national employment level.
What factors contribute to this loss of innovation? Phelps believes that vested interests have taken on a significant role in corporate America and also in Europe. Professions such as education and medicine have also erected insurmountable barriers such as regulation and licensing to prevent experimentation. Corporations along with their lobbyists and an army of patent lawyers have also put up barriers to drive out small innovators. If there are small innovators out there, they will be absorbed by large players the next day as we have seen often in the pharmaceutical industry.
Another factor that suppresses innovation is the conservative education system. In Phelps’ article, he criticizes schools for not showing enough interest in teaching children great books of adventure and personal development. There is no emphasis on taking risks to experiment and innovate. Parents are equally at fault for encouraging children take the most conservative career path, a job with a high pay but no risks. Although not specifically mentioned in his article, I believe the modern age of helicopter parenting also hinders a child’s ability to take risks.
What can Western economies do to bring back its love for innovation? Phelps believes before we take concrete steps, we must remember that standard economics is only a tool for efficiency. It is detrimental to an economy that needs to flourish.
“Widespread flourishing in a nation requires an economy energized by its own homegrown innovation from the grassroots on up. For such innovation a nation must possess the dynamism to imagine and create the new—economic freedoms are not sufficient. And dynamism needs to be nourished with strong human values.” – Edmund Phelps in What is Wrong with the West Economies?
The best place in which we can start taking steps is the classroom. Students must be taught that the economy is not a place where they are mere tools, but a place where they can actively participate as creators and thinkers. It will also be critical that schools expose students to the human values in great Western literary works, so that they will be motivated to use their imagination and creativity in their careers. This reorientation of general education should be strengthened by a paradigm shift in the teaching of economics. Not long ago, Fareed Zakaria was also promoting a book on the value of a liberal arts education (and I also wrote a commentary on this site). A well-rounded education consists of both liberal arts and math and sciences.
Countless articles and books have been published on how we can all work towards a just economy – the idealistic notion that nobody should be profiting at somebody else’s expense. We bicker over what the ideal minimum wage should be. Left-wing politicians in a desperate bid to win an election, are advocating at least a $15 minimum wage to appease poverty advocacy groups and unions. Politicians in both Canada and the US have renewed their vows to protect middle-class jobs from being outsourced. It is not just Donald Trump who is concerned about jobs going to China and Japan among his many angry rants. It is politicians of all stripes from the likes of Donald Trump to the more intellectual ones. All of these actions are just responding to the forces of globalization. All of these responses, as well-intentioned as they are, are actually quite meaningless. In Western capitalism, there will always be injustices as Phelps writes. What Phelps can teach all of us is to stop being passive observers. We are not all helpless in the face of global changes. There are various concrete steps we can take now to bring that innovation spirit to our everyday life.