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August 23, 2013 8:10 pm
Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change, by Edmund Phelps, Princeton, RRP£19.95/$29.95, 392 pages
Edmund Phelps is known to economy watchers as the co-inventor, with the late Milton Friedman, of the doctrine that there is no long-term trade-off between inflation and unemployment; or, in more popular terms, you do not buy more jobs by tolerating high inflation, although a short-term stimulus is always possible. I will not risk my neck by pontificating on who got there first: probably some unheard-of pundit many generations back. One might have thought that Phelps would have achieved more publicity for this doctrine – which, with all due qualifications, happens to be correct. But, Nobel Prize in economics notwithstanding, he does not have Friedman’s genius for self-publicity.
In Mass Flourishing, drawing on a long academic career, Phelps paints on a much wider canvas. In old-fashioned terminology his book might have been called “A course in applied macroeconomics”, but that would hardly have appealed to publishers. The author ranges extremely widely and any student of any age will gain something from it, irrespective of political views.
Phelps believes that competitive market capitalism has contributed more to mass flourishing than any rival system; he is also worried by what he perceives as a waning of faith in its virtues, even in the US. But he has little time for the business school view that business is about risk-assessment and cost control. Instead it is, or should be, about “ambiguity, uncertainty, exploration, and strategic vision”.
A chapter on socialism, although it should be read by those still tempted by that strange collectivist doctrine, covers well-worn ground. The outstanding feature of the book is its demolition of corporatism: the system based on the belief that “with labor and capital talking together [in an organised way] a new economy of unity and purpose would arise that would put an end to lockouts and threats of mass dismissals on the part of employers and to shirking, work stoppages, and general strikes on the part of employees”.
For some misguided leftists, this was the hallmark of “the third way”; and it is also how many modern businessmen would justify a reformed capitalism over the proverbial glass of beer. To be candid: I once put my toe into this morass when I supported the UK National Economic Development Council two-thirds of the way through the last century. But it soon became apparent that this kind of institution would either have to develop into a full-scale economic directorate or wither into insignificance.
Phelps does not hide his distaste for the corporatist value system, which replaces market competition with “the insidious competition of producers and professionals for a share of government contracts and a place in government-sponsored enterprises”. Corporatism is a matter of degree; but Phelps has no difficulty in showing that, compared with the more primitively capitalist Anglo-Saxon economies, the relatively corporatist continental European ones have done worse rather than better. They failed to deliver, argues Phelps, because they “lacked something needed to enable, stimulate and spur experimenting, exploring, and trying things out. Therefore their economies were missing the ingredients required for operating at the productivity frontier and thus for having high mean levels of employment.”
These are brave words when the world is still struggling to emerge from a banking crisis; but a comparison between the evidence of US recovery and European struggles to maintain, at vast cost, the top-down euro project suggests that he is likely to be vindicated.
I could not entirely sympathise with Phelps’s orthodox abhorrence of budget deficits, although with a mass of macroeconomic studies to his credit, I should hesitate to take him on in public debate. But if I tried to reconstruct his underlying argument in Keynesian terms it would be that such policies are often used, not just to stimulate consumer spending, but to justify a wholesale intrusion of dubious public projects that are supposed “to create jobs”.
There is nothing in sensible demand management to justify what the author describes as “an explosion of regulations, grants, loans, guarantees, taxes, deductions, carve-outs, and patent extensions intended mainly to serve vested interests, political clients, and cronies”. It certainly does not help to create jobs that anyone deciding to set up an innovative company would have his property right diluted “as it copes with an array of figures – its own workforce, interest groups, advocates, and community representatives – who ardently believe they have a legitimate ‘stake’ in the company’s results”.
Phelps obviously realises that Americans cannot go back to their founders’ vision of political leaders as “persons pausing for an interlude from their private endeavours, primarily businesses ranging from large farms to urban factories, offices, and shops”. But this still does not justify “subsidies for growing soy for biofuels, for the purchase of solar panels, for profitless green energy companies, and for the ventures of [government mortgage agencies] Fannie Mae and Freddie Mac”. The core message of this book is the need to minimise special-interest legislation.
Phelps does not disdain conventional reformist proposals such as the restoration of “relational banking”. Banks should have a narrower mission, leaving risky assets to financial markets with the appropriate expertise. More fundamentally, he rages against mutual funds that threaten a chief executive with dumping his company’s stock unless he fixes his attention on the next quarter’s earnings figures. He points to restrictionist practices such as the lawsuit of the US government against Boeing for opening a plant in a “right-to-work” state that prohibits closed-shop agreements between employers and unions; and to a reorganisation of General Motors that puts the union trust fund ahead of the claims of bondholders.
What Phelps and those who think like him have still to demonstrate is that the more lethargic, who do not want to be fiercely innovative either in their work or in their leisure, will still benefit more from a competitive capitalist economy than from any of the alternatives proffered so far. This applies, after all, to some of us all of the time and to most of us some of the time.
Samuel Brittan is an FT columnist
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