A recent piece by Edmund Phelps in the New York Review of Books argues that Western economies have generally failed at giving the labour force access to jobs that provide self-respect.
The classsical idea of political economy is to let wages rates fall to what the market determines and then provide everyone with a safety net of unemployment benefit, healthcare etc. Although this policy does assist those in need, it negates the desire for people to do something with their lives besides consuming goods and leisure time. A lot of people have a desire to participate in a community in which they can interact and develop new skills and self-esteem.
People need to ‘flourish’
He goes into the notion of “flourishing”( defined as “using one’s imagination, exercising one’s creativity, taking fascinating journeys into the unknown, and acting on the world”), and how current Western economies act to deter such human activity. Phelps refers to this as the good life which typically involves acquiring mastery in one’s work and using imagination, creativity and taking the journeys into the unknown. These benefits are in experience and not in material reward – he quotes Kabir Sehgal “Money is like blood. You need it to live but it isn’t the point of life.”
He argues that individuals prospered in the 19th Century when in Europe and America, economies emerged with the dynamism to generate their own innovation. Participants were constantly trying to think of new ways to produce things. What made innovating so powerful in these economies was that it was not limited to elites. It permeated society from the less advantaged parts of the population on up. People of ordinary background might be involved in innovations, large and small. George Stephenson was illiterate, John Deere a blacksmith, Isaac Singer a machinist, Thomas Edison of humble origins. People of ordinary ability could also have innovative ideas.
The Mechanical Model of Economics
Today most companies are highly efficient and labour that are reasonably well off, have gone on saving pushing up their wealth to very high levels. As a consequence the supply of labour contracts as does the labour force participation rate. However many people although comparatively rich are poor in the conditions for the good life of flourishing and prospering. With the absence of innovation comes decreased investment and an underutilised labour force. This is especially prevalent in Europe where figures for levels of happiness are indicative of unemployment levels and job satisfaction – Spain (54), France (51), Italy (48), and Greece (37).
This is in contrast to nations which are labeled as ‘emerging’—Mexico (79), Venezuela (74), Brazil (73), Argentina (66), Vietnam (64), Colombia (64), China (59), Indonesia (58), Chile (58), and Malaysia (56).
The US has a similar syndrome with a productivity slowdown and the decline of job satisfaction but more significant is the loss of indigenous innovation in the established industries like traditional manufacturing and services that was not nearly offset by the innovation that flowered in a few new industries—digital, media, and financial. You may think that companies on Silicon Valley offer jobs that are very creative and forward thinking but companies like Google and Facebook account for only 3% of national income.
Causes of the narrowing of innovation?
Phelps looks at two possible causes of this narrowing of innovation.
- There has been a suppression of innovation by vested interests. Professions have had instituted regulation and licensing to curb experimentation and thus reducing innovation. He uses the example of the US car industry which was able to regain their positions in the market by government bailouts. This meant that companies like BMW and Toyota lose money in their attempts to be more innovative in order to acquire market share. Consequently companies would be skeptical of being innovative in the US car market. Furthermore stakeholders use lobbyists to regulate and implement patents which increases the barriers to entry for new entrants.
- Schools are doing less to expose the young to the great books of adventure and personal development. Parents teach their children from infancy to be careful and stay close to the family. There is discussion now of the overprotected child: the need for a return to “free range” children who are allowed to explore, to try things and take chances
The problem is that young people are not taught to see the economy as a place where participants may imagine new things, where entrepreneurs may want to build them and investors may venture to back some of them. It is essential to educate young people to this image of the economy.
We will all have to turn from the classical fixation on wealth accumulation and efficiency to a modern economics that places imagination and creativity at the center of economic life.