Edmund Phelps, a Nobel Prize-winning economist and a professor at Columbia University, has penned a thought-provoking piece in a recent issue of the New York Review of Books. He believes there are two types of economy: a just economy and a good economy. What we need is to bring back the good economy – an economy in which everyone will thrive with their own set of skills whether from an advantaged or a disadvantaged background. I will divide this post in two parts. Part 1 will describe Phelps’ idea and what he thinks is our biggest economic challenge. Part 2 will continue with his prescription for Western economies. As both the US and Canada are in an election season, my take is that politicians could benefit from Phelps’ idea.
When politicians or commentator speak of helping the middle class or setting the minimum wage, they are really talking about a just economy. These days, even workers in well-paying jobs and living the middle-class life are as concerned as their less prosperous neighbours about the future of their children – whether they will given an equal shot at moving to a higher rung in the socioeconomic ladder. To them, the system rewards the rich and well-connected and of course, their descendants. One does not have to look too far to find these children. In America, they are the children of old money or politics. There is also a similar pattern in Canada. As the leader of Canada’s Liberal Party, Justin Trudeau (the son of a former Prime Minister) has stressed many times before and during this election season that he is the champion for Canada’s middle class; only when we get the middle class going can we truly be on the road to prosperity. In America, Hillary Clinton (who was also a student of Rawlsian philosophy) is also trying to convey her message that she will stand up for middle-class values and defend the poor, immigrants and middle-class against the predators of Wall Street.
Phelps believes that a Western economy will never get rid of these unfair advantages. In his words, no amount of Rawlsian action can rid our economy of unfair advantages or pull up wages and employment levels. But the injustices of Western economies cannot fully explain the sluggish growth in productivity these days. What a Western economy needs is economic dynamism. It is part of a good economy. What is a good economy or a good life? He defines it as one involving the mastery of one’s work and gaining means to rewards whether in the form of material or non-material compensation. This experience is what he calls “prospering”. As Phelps puts it, a good life involves using one’s imagination, creativity and taking the roads less traveled in this world. He calls this exploration “flourishing”. He also quotes the writer Kabir Sehgal: “Money is like blood. You need it to live but it isn’t the point of life”.
The reason Western economies have slowed down is that we no longer encourage innovation. In Europe and America, economies of the 19th century emerged with great dynamism. There was a very strong entrepreneurial spirit that drove people to respond to the challenges and new opportunities within an evolving economy. There was a time when people were always trying to think of new ways to produce things or figure out new things to produce to respond to the needs of the economy. In Professor Phelps’ words, they were flourishing. The culture was also conducive to this way of thinking about the world – what can I do with my skills to contribute something useful to the economy? Phelps cites the examples of countries such as Britain, America, France and Germany, which fostered a culture of exploration and experimentation. This culture of innovation has deep roots in the Renaissance, Baroque and Romantic periods. Across the Atlantic, there was also an abundance new ideas and inventions in America. In fact, there was an innovation epidemic from Thomas Edison’s phonograph to Isaac Singer’s sewing machine.
Phelps believes that this era of innovation was not limited to elites. Anyone in society was capable of innovating from the most disadvantaged segment of the population all the way up. Even the most ordinary people could have innovative ideas with which they could make a very comfortable living. These people were lucky because they had a society that encouraged using their minds, solving problems and seizing the right opportunities wherever they may arise. This is an example of he calls a good economy – the one that allows everyone to flourish and prosper.
Unfortunately, Western economies have strayed far from this model. The current economic malaise comes from just sitting back and letting global market forces dictate the wages and employment levels. We have taken on a passive role as mere observers of the global changes and we are have become more reactionary than proactive. As Phelps succinctly puts it, there is no human agency; we are merely responding to wages, interest rates and wealth. The economies have become robotic or mechanical. We may still be growing crops or extracting oil, but there is zero personal growth. The type of energy and drive to innovate for most people is non-existent. We have become a society of wage slaves, not innovators and thinkers. What’s dangerous to Phelps is that this type of economy has become the norm. He is afraid that Western economies are becoming products of basic classical economics, which is devoid of creativity and imagination.
To be Continued …