Edmund Phelps:

Edmund Phelps begins by pointing out that "output per head" (whatever that means) skyrocketed between 1830 and 1870. The USA had already started a similar boom. France and Prussia followed soon. Wages started rising too (based on research and speculation by German economist Juergen Kuczynski) A little later "output per head" has become "productivity". Productivity tripled between 1820 and 1913 in the USA and Britain. Traditinal economic models cannot explain this fact. Phelps' solution is to focus on "knowledge of how to produce and knowledge about what to produce". Phelps criticizes classical economic theory (Smith, Malthus, Ricardo) that views market economies as always in a state of equilibrium and Schumpeter's "near-classical" theory with its concept of punctuated equilibrium.

Classical economists viewed progress in a country as driven by discoveries of scientists and explorers external to the country's economy. Phelps points out the weakness of this argument: knowledge is widely available in peer-reviewed journals, so in theory it should benefit equally all societies. Instead, some societies benefit a lot more than others. He concludes that scientific discoveries cannot possibly be the driver of the exponential increase in economic knowledge. He is equally skeptic of inventions: the inventions of 18th century British textile industry increased productivity in the textile sector, but the textile sector was a small sector of the British economy. He credits instead the "dynamism" of a society, the willingness and capacity to innovate. He defines "innovation" as "a new method or a new product that becomes a new practice somewhere in the world". To this he later adds features such as: innovations have an accidental element, innovators "are driven by an inner need to demonstrate the superiority of their understanding", innovations are "not determinate from current knowledge, thus they are not foreseeable", and so on. Anyway, it soon becomes clear that his focus is on grass-roots innovation. The growth rate of an economy is not enough to measure the dynamism of its society: Phelps' "dynamism " is not productivity growth. Economic dynamism is the willingness and capacity to innovate, and manifests itself in grassroots innovation.

This sounds complicated but i assume that it simply means that innovation is the driver of economic growth. What doesn't seem to qualify as innovation: imitation that improves over the original (i.e. 99% of what China has achieved since the 1990s, which resulted in the most spectacular economic book of the modern era), improvements that changed the lives of millions of people (think Moore's law), products that solve practical well-known problems (e.g. medicines).

Phelps criticizes classical economists because they fail to see the difference between "modern economies, less modern ones and nonmodern ones". He specifically states that modern economies are mostly made of ideas, not goods and services (alas, five lines later he lists the "ideas" and you're disappointed to read a list of chores that low-level bureaucrats carry out in any corporation). He thinks that it is the ideas that lead to innovation. He then describes "modern economies" as the Silicon Valley paradigm of investor and startup. He calls it "modern capitalism" instead of the old "mercantile capitalism". Modern capitalism focuses on innovation (but it is not clear what "innovation" he is talking about because he doesn't consider innovation what happens in commerce and doesn't consider scientific innovation as crucial: so is it just the way companies work? business innovation?) Then he asks what causes the creation of ideas and mocks those who think that only scientists can have ideas. (Of course, every human being has ideas, and maybe some animals too - he never bothers to define what he means by "ideas"). Let's assume that he means "a system that encourages people to be creative/innovative". He calls it the "imaginarium". The immaginarium can only exist in economies that encourage and enable people to innovate with both pecuniary and nonpecuniary motivations. He credits Friedrich Hayek (author of "The Use of Knowledge In Society") as "the first economist to view economies from this perspective". The problem remains that we don't know what Phelps is talking about. He argues that inventors are not important for innovation but then only talks about famous inventors. After saying that "some innovations are accidental" he mentions Edison and Fleming. He writes "All innovations have an accidental or random element". The fundamental feature of innovations is that they are unpredictable and therefore have an impact on history. This is given as a dogma. Apparently, nothing that was predictable had an impact on history.

Phelps finally says something interesting when he says that economies should not be classified by their structure but by their consequences. Unfortunately the rest of his book does exactly the opposite.

The chapter on the "Arts and Letters" is particularly baffling. I guess it is just about his personal taste in art, music and literature. He cherry-picks some great artists and omits many others, probably to serve his own narrative. If you think that Joyce (who wrote in Dublin) and Kafka (who wrote in Prague) were the two most innovative writers of the early 20th century, you'll be disappointed: they are not mentioned. I think the greatest literature of the 19th century is the Russian one: Dostoevsky, Tolstoy, Gogol, etc. Phelps ignores the whole Russian literature. I think the most influential narrative school of the late 20th century was magic realism from Latin America (Garcia-Marquez, Vargas Llose, Ernesto Sabato, etc): wiped out by Phelps. The greatest poets of the early 20th century were in Spain, right? Garcia Lorca, Machado, Jimenez, etc. Irrelevant, according to Phelps. Ireland is wiped out from the map of innovative literature despite Yeats, Shaw, Beckett, Joyce and Heaney. And of course no Dada and no Italian futurism. Phelps is clearly (but clumsily) trying to prove some kind of connection between innovation in the arts and his kind of innovation, but he cornered himself by stating that the great innovation happened in Britain, USA, Belgium (?), Germany and France. So he has to ignore the fact that Britain didn't produce one (not even one) great classical composer in all the centuries that classical music has existed. The whole chapter feels a little goofy. It ends with a scathing indictment of "the endless loops of Philip Glass and the irony of Pop Art". With all due respect, he has never read a book on "modern" music and art. There is a lot more than he knows. He missed a few thousand great writers, artists and musicians (not to mention the innovators of jazz and rock music, and the innovators of world cinema). Had he spent more time studying rock and hip-hop he may have realized that a lot of creative comes from unemployment, but i digress.

He criticizes Max Weber for not discussing "experimentation, exploration, daring and unknowability - the hallmarks of indigenous innovation". Any mathematician will go mad reading this book where definitions are always vague and seem to change with every chapter.

He attacks the theories that natural resources or the scarcity of natural resources cause creativity. He argues that economic institutions are the real key to creativity/innovation. (Of course the question remains: "what causes the rise of economic institutions and some countries and not in some others?") The institutions that he likes are freedom (including democracy), property and finance. Then he briefly adds the "pursue of happiness". The conclusion of the chapter comes unexpected because it doesn't quite follow logically from the previous discussion, but here it is: "what sparked this dynamism was a new economic culture. Its necessary nutrients were representative democracy and a cultural revolution originating in Renaissance humanism, Baroque vitalism, and Enlightenment modernism. Representative democracy ensured property rights but also stimulated self-reliance and social engagement". Whether you agree or not with these vague statements, none of this is proven logically anywhere in the book.

His insistence in listing Belgium among the five most innovative countries feels particularly intriguing: what is special about Belgium?

I can summarize the first (maddeningly confusing) 100 pages of the book using his (better) article "The Dynamism of Nations - Toward a Theory of Indigenous Innovation" (in Capitalism and Society of 2017). Classical economists assume that science yields ideas, engineers apply ideas to design products, entrepreneurs make them and sell them. (At this point those not familiar with economics may roll their eyes: really? Yes, really). Phelps objects that this is not always the case. (Phelps goes too far in criticizing classical theory because he mentions cinema, the radio, television, the computer and the World-wide web as not having anything to do with scientific discoveries when in fact they discend directly from scientific discoveries made in scientific laboratories). Phelps shifts the emphasis from science towards "business" knowledge about what to produce and how to produce it. He thinks that this kind of knowledge is fostered by some societies (and he keeps naming USA, Britain, Germany, France and Belgium) and stifled by others. Those that do foster this kind of knowledge are more likely to involve the workforce in the creative process and this makes the workforce happier despite the fact that these economies are unpredictable as innovation is largely random. These are "dynamic" societies and he calls "dynamism" the general character of these societies that foster business knowledge. Widespread economic growth depends on dynamism. Dynamism not only makes people richer but also happier (the "mass flourishing" of the book's title). Such societies have values that protect "freedoms" and encourage creativity, innovation and disruption at the cost of unpredictability.

Things get more interesting when Phelps discusses "corporatism" if you can wade through his dense and confused prose. He contrasts the dynamic societies (whose values are "modern" values of competition, instability and unpredictability) with societies that place values on predictability, stability and security (which he calls "traditional values"). The desire for predictability, stability and security resulted in two main economic alternatives to capitalism: socialism (which Phelps liquidates quickly) and "corporatism". Corporatism is a remedy against competition, which some societies view as a disease. Corporatism was invented by Mussolini and then copied by other fascist dictators and even by post-war Japan and South Korea: it is basically one-party capitalism in which the state controls the economy and decides which corporations have to grow. Typically, corporatist governments prefer to deal with an economy dominated by a few giant corporations than with an economy characterized by many small enterprises. Corporatism means that the government introduces policies that limit competition and therefore stifle innovation. Government subsidizes activities that lose money if such activities protect people from hardships. Corporatism reduced dynamism. Corporatism triumphed in Western Europe and made inroads in the USA (when Roosevelt signed the "National Labor Relations Act in 1935 or when Nixon introduced wage and price controls in the 1970s) and Britain. About the USA, Phelps talks about a second transformation in 1970-2010 that was a turn towards corporatism, the opposite of what happened with the first transformation of 1820-1930 that created modern capitalism. Quote: "Corporatism's managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advances." Phelps thinks that increased corporatism will lead to economic stagnation.

I am not sure that i correctly summarized Phelps' thought because his writing is never straightforward and never logical. Check this out: "Modern values (attitudes and beliefs) continue to the present day to be prevalent... in the nations of the West. Modernist values include norms like thinking and working for yourself and self-expression. These values also include attitudes toward others: readiness to accept change caused or desired by others; eagerness to work with others; the desire to test oneself against others, thus to compete; and the willingness to take the initiative, thus to go first... Other modernist attitudes include the desire to create, explore, and experiment, the welcoming of hurdles to surmount, the desire to be intellectually engaged, and the desire to have responsibility and to give orders. Behind these desires is a need to exercise one's own judgment, to act on one's own insights, and to summon up one's own imagination... Selfdiscovery and personal development are major vitalist values... All this stands in contrast to traditionalism with its notions of service, obligation, family, and social harmony".

Assuming that i understood correctly such convoluted and vague paragraphs, the next problem is that Phelps contradicts himself. For example, he points out that the "corporatist" economies of post-war Western Europe almost caught up with the USA by sheer imitation: they simply adopted whatever innovation came from the USA. Quote: "In the past three decades, up to the 2007-2008 crisis, the growth of the Big 4 on the European continent (France, Germany, Italy, and Spain) continued to be driven by advances external to their economies, mainly (but not exclusively) advances made in the United States... The corporatist economies must have come close to catching up with the American economy mainly by imitation." Europe was "devoid of indigenous innovation". The result is that European growth depends on US growth. Fine: but we are back to Phelps' vague definition of "innovation". Both the World-wide Web and the smartphone were invented in Europe, but somehow he doesn't think that they qualify as "indigenous innovation". Both ARM and DeepMind are British (very British). I am not sure if he thinks that they qualify as "indigenous innovation". How does he measure "indigenous innovation"? Are Hollywood movies more innovative than the films of Michelangelo Antonioni, Federico Fellini, Luis Bunuel, Theo Angelopoulos, Pedro Almodovar, Michael Haneke, etc? Except for Pynchon, Toni Morrison and Cormac McCarthy, which US writers are more innovative than Juan Goytisolo, Jose Saramago, Agustina Bessa-Luis, Georges Perec, Michel Tournier, Uwe Johnson, Jenny Erpenbeck, Thomas Bernhard, Elfriede Jelinek, Italo Calvino, Elena Ferrante, Seamus Heaney? (i am limiting myself to Western Europe). And i don't want to start listing the great composers, artists and philosophers of today's Western Europe. There is a lot of ignorance at work in this book.

The last chapters turn to remedies, how to restore grassroots dynamism and indigenous innovation, the "modern" economy's relentless quest to innovate, i.e. how to eliminate socialism and corporatism and restore free-market capitalism. He points out structural faults in large firms, mutual funds and banks, but mostly criticizes government policies aimed at controlling the economy with regulations.

To justify his argument in favor of the "modern" (hyper-competitive) economy, Phelps devotes a chapter to defining what is a "good life". He refers all the way back to Aristotle and his concept of "eudaimonia" as well as to Bergson's "vitalism". This is where i "almost" agree with him: you are happier if you have challenges, not if you live a preordained life; if your life constantly brings you new emotions and new knowledge; if your life is dynamic and you are immersed in a dynamic world. Money is not everything. Life is more than simply collecting money in a bank account. Where many would disagree with Phelps is on what this exactly means: if the government paid you a salary for doing nothing, you could devote more time and energies to creative activities. Most people, instead, are forced to spend their time and energy on jobs that are meaningless, and are then too tired to engage in creative activities. Perhaps the welfare state that Phelps dislikes is precisely the reason that Europe tends to have more creative writers and filmmakers than the USA, despite the fact that writers and filmmakers make a lot more money in the USA than in Europe. Furthermore, Phelps doesn't distinguish between young and old people. A younger person is excited to work in a place where things are changing rapidly. An older person is scared: the older workers want stability, not rapid progress. The evidence is overwhelming that the rapid change of today's business is creating anxiety and alienation among the older generations of workers: training for a new job is not what they desire, nor probably what they are capable of doing at their age. And so i "almost" agree with Phelps on this issue: it is true as long as you focus only on the younger workers. Older workers, overwhelmingly, prefer the status quo, the routine, the protected job.

There's a chapter on what is a "just economy" that again shows Phelps' limited knowledge of what he talks about: his main source is John Rawls, and a little bit of Amartya Sen, but of course there's a lot more to discuss: George Pugh, Lawrence Kohlberg, Peter Singer, Parfit Derek, Giorgio Agamben, Susan Wolf, Philip Pettit, Marcia Baron, Michael Slote, Jonathan Haidt, etc.

Phelps comes through as a bad historian with little knowledge of cultural movements. His grand statements are often vague and sometimes contradictory: "Hayek said that no state could create a system for economic efficiency - though Lenin came pretty close". He seems to take literally the ancient legends: "They did not stop William II from taxing the politically weak and economically poor farmers, which the outraged Robin Hood sought to redress". There are glaring errors: Charles Babbage is not the inventor of the computer (he died 80 years before the first computer was sold), just one of the many thinkers who led to that invention over the centuries, Roosevelt did not "pack" the Supreme Court (he tried but failed), and Reagan expanded the Earned Income Tax Credit in the 1986 Tax Reform Act.