‰ MASS FLOURISHING OTHER BOOKS BY EDMUND PHELPS Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise Enterprise and Inclusion in Italy Seven Schools of Macroeconomic Thought: The Arne Ryde Memorial Lectures Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interest, and Assets Political Economy: An Introductory Text Studies in Macroeconomic Theory (2 volumes) Economic Justice (editor) Inflation Policy and Unemployment Theory Microeconomic Foundations of Employment and Inflation Theory (with others) Fiscal Neutrality toward Economic Growth ‰ MASS FLOURISHING How Grassroots Innovation Created Jobs, Challenge, and Change EDMUND PHELPS The 2006 Nobel Laureate in Economics PRINCETON UNIVERSITY PRESS Princeton and Oxford Copyright © 2013 Edmund S Phelps Requests for permission to reproduce material from this work should be sent to Permissions, Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, Oxford Street, Woodstock, Oxfordshire OX20 1TW press.princeton.edu Jacket design by David Drummond, Salamander Hill Design Willa Cather epigraph courtesy Knopf/Random House Jackie Wullschlager epigraph from Financial Times © The Financial Times Limited 2013 All rights reserved Hunter S Thompson epigraph reprinted with the permission of Simon & Schuster, Inc from Songs of the Doomed Copyright © 1990 Hunter S Thompson John Rawls epigraph reprinted by permission of the publisher, from A Theory of Justice: Revised Edition, p 4, Cambridge, MA: The Belknap Press of Harvard University Press, Copyright © 1971, 1999 by the President and Fellows of Harvard College All Rights Reserved ISBN 978-0-691-15898-3 Library of Congress Control Number: 2013936720 British Library Cataloging-in-Publication Data is available This book has been composed in Calluna with Filosofia and DIN display by Princeton Editorial Associates Inc., Scottsdale, Arizona Printed on acid-free paper ∞ Printed in the United States of America 10 CONTENTS Preface vii Introduction: Advent of the Modern Economies PART O NE The Experience of the Modern Economy How Modern Economies Got Their Dynamism 19 Material Effects of the Modern Economies 41 The Experience of Modern Life 55 How Modern Economies Formed 77 PART T WO Against the Modern Economy The Lure of Socialism 113 The Third Way: Corporatism Right and Left Weighing the Rivals on Their Terms 170 The Satisfaction of Nations 193 PART T H REE 10 11 12 135 Decay and Refounding Markers of Post-1960s Decline 219 Understanding the Post-1960s Decline 237 The Good Life: Aristotle and the Moderns 268 The Good and the Just 289 Epilogue: Regaining the Modern 310 Timeline: Modernism and Modernity Bibliography 337 Acknowledgments 351 Index 353 325 PREFACE When I first saw Los Angeles I realized that no one had ever painted what it looked like DAVID HOCKNEY hat happened in the 19th century that caused people in some countries to have—for the first time in human history—unbounded growth of their wages, expansion of employment in the market economy, and widespread satisfaction with their work? And what happened to cause many of these nations—by now, all of them, or so it would appear—to lose all that in the 20th century? This book aims to understand how this rare prosperity was gained and how it was lost I set out in this book a new perspective on what the prosperity of nations is Flourishing is the heart of prospering—engagement, meeting challenges, self-expression, and personal growth Receiving income may lead to flourishing but is not itself a form of flourishing A person’s flourishing comes from the experience of the new: new situations, new problems, new insights, and new ideas to develop and share Similarly, prosperity on a national scale— mass flourishing—comes from broad involvement of people in the processes of innovation: the conception, development, and spread of new methods and products—indigenous innovation down to the grassroots This dynamism may be narrowed or weakened by institutions arising from imperfect understanding or competing objectives But institutions alone cannot create it Broad dynamism must be fueled by the right values and not too diluted by other values The recognition by a people that their prosperity depends on the breadth and depth of their innovative activity is of huge importance Nations unaware of how their prosperity is generated may take steps that cost them much of W vii their dynamism America, judging by available evidence, does not produce now the rate of innovation and high job satisfaction it did up to the 1970s And participants have a right not to see their prospects of prospering—of self-realization, as John Rawls termed it—squandered In the past century, governments sought to move the unemployed into jobs so they could prosper again Now there is a larger task: to reverse losses of prosperity among the employed That will require legislative and regulatory initiatives having nothing to with boosting either “demand” or “supply.” It will require initiatives based on an understanding of the mechanisms and mindsets on which high innovation depends Yet surely governments can it Some began clearing paths for innovation two centuries ago These thoughts were on my mind when I conceived this book I believed the sole problem was the terrible unawareness Eventually I began to sense another kind of problem: a resistance to modern values and modern life The values that supported high prosperity ran up against other values that impeded and devalued flourishing Prosperity has paid a heavy toll Questions are being asked about the sort of life it would be best to have and thus the sort of society and economy to have There are calls in America for traditionalist goals long familiar in Europe, like greater social protection, social harmony, and public initiatives in the national interest These were the values that have led much of Europe to viewing the state in traditional, medieval terms—through the “lens of corporatism.” There are calls too for more attention to community and family values There is little awareness of how valuable modern life, with its flourishing, was There is no longer in America or in Europe a sense of what mass flourishing was like Nations with brilliant societies a century back, say, France in the Roaring Twenties, or even a half-century ago, say, America in the early sixties, have no living memory of wide flourishing Increasingly, the processes of a nation’s innovation—the topsy-turvy of creation, the frenzy of development, and painful closings when the new things fail to take hold—are seen as a pain that upstart materialist societies were willing to endure to increase their national income and national power, but that we are unwilling to endure any longer The processes are not seen as the stuff of flourishing—the change, challenge, and lifelong quest for originality, discovery, and making a difference This book is my response to these developments: It is an appreciation of the flourishing that was the humanistic treasure of the modern era It is also a plea to restore what has been lost and not to reject out of hand the modern values that inspired the broad prosperity of modern societies viii / P R E FA C E I first set out a narrative of prosperity in the West—where and how it was won and how to varying degrees it has been lost in one nation after another After all, much of our understanding of the present comes from trying to put together some pieces of our past But I also study cross-country evidence of the present day At the core of the narrative is the prosperity that broke out in the 19th century, firing imaginations and transforming working lives Widescale flourishing from engaging, challenging work came to Britain and America, later to Germany and France The step-by-step emancipation of women there and, in America, the eventual abolition of slavery, widened the flourishing The making of new methods and products that was part of this flourishing was also the major part of the economic growth that coincided with it Then, in the 20th century, flourishing ultimately narrowed, and growth slipped away In this narrative, the historic run of prosperity—from as early as the 1820s (in Britain) to as late as the 1960s (in America)—was a product of pervasive indigenous innovation: the adoption of new methods or goods stemming from homegrown ideas originating in the national economy itself Somehow the economies of these pioneering nations developed dynamism—the appetite and capacity for indigenous innovation I call them modern economies Other economies gained by following the modern ones in their slipstream This is not the classic account by Arthur Spiethoff and Joseph Schumpeter of entrepreneurs jumping to make the “obvious” innovations suggested by discoveries of “scientists and navigators.” The modern economies were not the old mercantile economies, but something new under the sun Understanding the modern economies must start with a modern notion: original ideas born of creativity and grounded on the uniqueness of each person’s private knowledge, information, and imagination The modern economies were driven by the new ideas of the whole roster of business people, mostly unsung: idea men, entrepreneurs, financiers, marketers, and pioneering end-users The creativity and attendant uncertainty was seen through a glass darkly in the 1920s and 1930s by those early moderns, Frank Knight, John Maynard Keynes, and Friedrich Hayek Much of the book is occupied with the human experience in the innovation process and the flourishing it brings The human benefits of innovation are a basic product of a well-functioning modern economy—the mental stimulus, the problems to solve, the arrival of a new insight, and the rest I have sought to convey an impression of the rich experience of working and P R E FA C E / ix ... Foundations of Employment and Inflation Theory (with others) Fiscal Neutrality toward Economic Growth ‰ MASS FLOURISHING How Grassroots Innovation Created Jobs, Challenge, and Change EDMUND PHELPS... knowledge and thus to new practice, or innovation, were uncommon Ancient Greece and Rome made some innovations—the water mill and bronze casting, for example Yet it is the dearth of innovation. .. output per capita and wages per worker: Austria, Britain, Belgium, Denmark, France, Germany, Holland, Italy, Norway, Sweden, and Switzerland (Even in the 1200s and early 1300s, England was not the