Dynamic Capitalism

Edmund S. Phelps
Wall Street Journal (10OCT06)

Mr. Phelps, a McVickar Professor of Political Economy at Columbia University, was the recipient of the 2006 Nobel Memorial Price in Economic Sciences.

2 economic systems in the West:

  1) Private-ownership (US, Canada, UK)

  2) Private-ownership with protection of the interests of "stakeholders" and "social partners" (Continental Europe)

 • System 1 is marked by greater openness to the implementation of new commercial ideas coming from entrepreneurs plus a pluralism of view among the financiers who select the ideas to nurture by providing the capital and incentives necessary for their development.

 • System 2 institutions include big employer confederations, big union and monopolistic banks.  This system operates to discourage changes such as relocations and the entry of new firms, and its performance depends on established companies in cooperation with local and national banks.  What it lacks in flexibility it tries to compensate for with technological sophistication.  In Germany #2 is known as "social market economy"; in France - "social democracy"; in Italy - "concertazione".

 • System 2's theory was that not having to fear fluid market condition, an entrenched company could afford to develop radical innovations.  With industrial confederations and state mediation available, such companies could arrange to avoid costly duplication of their investments (ie, intervention to settle conflicts about the economy's direction).  This corporatist economy was expected to usher in a new futurismo that was famously symbolized by Severini's paintings of fast trains (what was important was that the train was rushing forward, not that it ran on time).

 • Important Question: who is accountable when things go wrong?

 • Friedrich Hayek (late 1930's) began the modern theory of how a capitalist system, if pure enough, would possess the greatest dynamism - not of socialism and not of corporatism.

 1) everyone down to the humblest employee has "know-how".  Openness to the ideas of all or most participants generates new ideas.
 2) pluralism of experience that the financiers bring to bear in their decisions gives a wide range of entrepreneurial ideas a chance of insightful evaluation.
 3) financier and the entrepreneur do not need the approval of the state or of social partners (not accountable to them if the project goes badly).
 4) big state/union oversight entities won't undertake projects that are too opaque and uncertain.
 5) the managers and consumers decide which new innovations to try and adopt; where the Continental system convenes experts to set a product standard before any version  is  launched.

 • The issues swirling around capitalism today concern the consequences of its dynamism.  The same capitalist dynamism that adds to the desirability of jobs (ie, fun, challenging problem-solving jobs) also adds to their precariousness.  Important to have a sense of perspective when confronted with the prospect of a general slump and to check one's anxiety.  In truth, the Continental economies are also susceptible to wide swings. Even a market socialist economy might be unpredictable.  In fact, it is the corporatist economies that have suffered the widest swings in recent decades (US and UK unemployment rate have been remarkably steady for 20 yrs).  When the Continental economies are down, the paucity of their dynamism makes it harder for them to find something new on which to base a comeback.

 • The US economy might be said to suffer from incomplete inclusion of the disadvantaged.  But that is less a fault of capitalism than of electoral politics.  US economy is not unambiguously worse than the Continental ones in this regard: low-wage workers at least have access to jobs (important value to them to be role models to their family and community).

 • The "downside" of capitalism is exaggerated by some Western Continental Europeans because they consider its elements morally wrong (in the same way as birth control, nuclear power, sweatshops).  There are wrong in spite of the consequence of barring them.

 • Street protesters (eg, WTO, [Occupy Wall Street]) tend to associate business with established wealth; in their minds, giving greater latitude to businesses would increase the privileges of old wealth.  By an "entrepreneur" they appear to mean a rich owner of a bank or factory, while for others it meant a newcomer, a parvenu who is an outsider. A tremendous confusion is created by associating "capitalism" with entrenched wealth and power.  Hayek's capitalism means opening industries to start-up companies, and opening existing companies to new owners and new managers (adequate degree of competition; note: monopolies like Microsoft are a deviation from the model).

 • Generating more dynamism through the injection of more capitalism does serve economic justice.  We all feel good to see people freed to pursue their dreams.  Yet Hayek and Ayn Rand went too far in taking such freedom to be an absolute, the consequences be damned. The conception of 'economic justice' is aptly discussed by John Rawls.  In any organization of the economy, the participants will score unequally in how far they manage to go in their personal growth.  An organization that leaves the bottom score lower than it would be under another feasible organization is unjust.  So a new organization that raised the scores of some, thought at the expense of reducing scores at the bottom, would not be justified.  Yet a high score is just if it does not hurt others.  "Envy is the vice of mankind" said Kant (Rawls greatly admired Kant).

 • Rawls's lowest score candidates are the workers with the lowest wage - the "least advantaged": Their self-realization lies mostly in marrying, raising children and participating in the community and it will be greater the higher the wage (whereas for others self-realization comes from their career).  Increased dynamism created by liberating private entrepreneurs and financiers tends to raise productivity and in turn pulls up the bottom wages (or any rate does not lower them). Not unjust.  Fact: Two centuries of commercial innovations have pulled up the wage rates at the low end and everywhere else.

 • The tone above is wrong.  As Kant also said, persons are not to be made instruments for the gain of others.  Suppose the wage of the lowest-paid workers was foreseen to be reduced over the entire future over innovations conceived by entrepreneurs.  Are those whose dream is to find personal development through a career as an entrepreneur not to be permitted to pursue their dream?  To respond, we have to go outside Rawls's classical model, in which work is all about money. In an economy in which entrepreneurs are forbidden to pursue their self-realization, they have the bottom scores in self-realization--no matter if they take paying jobs instead--and that counts whether or not they were born the "least advantage".  So even if their activities did come at the expense of the lowest-paid workers, Rawlsian justice in this extended sense requires that entrepreneurs be accorded enough opportunity to raise their self-realization score up to the level of the lowest-paid worker (LPW)--and higher, of course, if workers are not damaged by support for entrepreneurship.  In this case, too, then, the introduction of entrepreneurial dynamism serves to raise Rawls' bottom scores.

 • Actual capitalism departs form well-functioning capitalism -- monopolies too big to break up, undetected cartels, regulatory failures and political corruption.  Capitalism in its innovations plants the seeds of its own encrustation with entrenched power.  These departures weight heavily on the rewards earned, particularly the wages of the least advantaged, and give a bad name to capitalism.  It would be a non sequitur to give up on private entrepreneurs and financiers as the wellspring of dynamism merely because the fruits of their dynamism would likely be less than they could be in a less imperfect system.

 • Capitalism is justified by 1) providing expectable benefits of the lowest-paid workers, 2) providing the entrepreneurial and creative types the opportunity for their self-expression.