What Is Wrong with the West's Economies? by Edmund S. Phelps | The New York Review of Books - 1 views
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What is wrong with the economies of the West—and with economics?
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With little or no effective policy initiative giving a lift to the less advantaged, the jarring market forces of the past four decades—mainly the slowdowns in productivity that have spread over the West and, of course, globalization, which has moved much low-wage manufacturing to Asia—have proceeded, unopposed, to drag down both employment and wage rates at the low end. The setback has cost the less advantaged not only a loss of income but also a loss of what economists call inclusion—access to jobs offering work and pay that provide self-respect.
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The classical idea of political economy has been to let wage rates sink to whatever level the market takes them, and then provide everyone with the “safety net” of a “negative income tax,” unemployment insurance, and free food, shelter, clothing, and medical care
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This failing in the West’s economies is also a failing of economics
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many people have long felt the desire to do something with their lives besides consuming goods and having leisure. They desire to participate in a community in which they can interact and develop.
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Our prevailing political economy is blind to the very concept of inclusion; it does not map out any remedy for the deficiency
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injustice of another sort. Workers in decent jobs view the economy as unjust if they or their children have virtually no chance of climbing to a higher rung in the socioeconomic ladder
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“Money is like blood. You need it to live but it isn’t the point of life.”4
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justice is not everything that people need from their economy. They need an economy that is good as well as just. And for some decades, the Western economies have fallen short of any conception of a “good economy”—an economy offering a “good life,” or a life of “richness,” as some humanists call it
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The good life as it is popularly conceived typically involves acquiring mastery in one’s work, thus gaining for oneself better terms—or means to rewards, whether material, like wealth, or nonmaterial—an experience we may call “prospering.”
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As humanists and philosophers have conceived it, the good life involves using one’s imagination, exercising one’s creativity, taking fascinating journeys into the unknown, and acting on the world—an experience I call “flourishing.”
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prospering and flourishing became prevalent in the nineteenth century when, in Europe and America, economies emerged with the dynamism to generate their own innovation.
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What is the mechanism of the slowdown in productivity
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prospering
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In nineteenth-century Britain and America, and later Germany and France, a culture of exploration, experimentation, and ultimately innovation grew out of the individualism of the Renaissance, the vitalism of the Baroque era, and the expressionism of the Romantic period.
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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.
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High-enough wages, low-enough unemployment, and wide-enough access to engaging work are necessary for a “good-enough” economy—though far from sufficient. The material possibilities of the economy must be adequate for the nonmaterial possibilities to be widespread—the satisfactions of prospering and of flourishing through adventurous, creative, and even imaginative work.
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today’s standard economics. This economics, despite its sophistication in some respects, makes no room for economies in which people are imagining new products and using their creativity to build them. What is most fundamentally “wrong with economics” is that it takes such an economy to be the norm—to be “as good as it gets.”
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ince around 1970, or earlier in some cases, most of the continental Western European economies have come to resemble more completely the mechanical model of standard economics. Most companies are highly efficient. Households, apart from the very low-paid or unemployed, have gone on saving
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In most of Western Europe, economic dynamism is now at lows not seen, I would judge, since the advent of dynamism in the nineteenth century. Imagining and creating new products has almost disappeared from the continent
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The bleak levels of both unemployment and job satisfaction in Europe are testimony to its dreary economies.
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a recent survey of household attitudes found that, in “happiness,” the median scores in Spain (54), France (51), Italy (48), and Greece (37) are all below those in the upper half of the nations labeled “emerging”—Mexico (79), Venezuela (74), Brazil (73), Argentina (66), Vietnam (64), Colombia (64), China (59), Indonesia (58), Chile (58), and Malaysia (56)
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The US economy is not much better. Two economists, Stanley Fischer and Assar Lindbeck, wrote of a “Great Productivity Slowdown,” which they saw as beginning in the late 1960s.11 The slowdown in the growth of capital and labor combined—what is called “total factor productivity”—is star
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though the injustices in the West’s economies are egregious, they ought not to be seen as a major cause of the productivity slowdowns and globalization. (For one thing, a slowdown of productivity started in the US in the mid-1960s and the sharp loss of manufacturing jobs to poorer countries occurred much later—from the late 1970s to the early 1990s.) Deeper causes must be at work.
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The plausible explanation of the syndrome in America—the productivity slowdown and the decline of job satisfaction, among other things—is a critical 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
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hat then caused this narrowing of innovation? No single explanation is persuasive. Yet two classes of explanations have the ring of truth. One points to suppression of innovation by vested interests
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some professions, such as those in education and medicine, have instituted regulation and licensing to curb experimentation and change, thus dampening innovation
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established corporations—their owners and stakeholders—and entire industries, using their lobbyists, have obtained regulations and patents that make it harder for new firms to gain entry into the market and to compete with incumbents.
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The second explanation points to a new repression of potential innovators by families and schools. As the corporatist values of control, solidarity, and protection are invoked to prohibit innovation, traditional values of conservatism and materialism are often invoked to inhibit a young person from undertaking an innovation.
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ow might Western nations gain—or regain—widespread prospering and flourishing? Taking concrete actions will not help much without fresh thinking: people must first grasp that standard economics is not a guide to flourishing—it is a tool only for efficiency.
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Widespread flourishing in a nation requires an economy energized by its own homegrown innovation from the grassroots on up. For such innovation a nation must possess the dynamism to imagine and create the new—economic freedoms are not sufficient. And dynamism needs to be nourished with strong human values.
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a reform of education stands out. The problem here is not a perceived mismatch between skills taught and skills in demand
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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.
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It will also be essential that high schools and colleges expose students to the human values expressed in the masterpieces of Western literature, so that young people will want to seek economies offering imaginative and creative careers. Education systems must put students in touch with the humanities in order to fuel the human desire to conceive the new and perchance to achieve innovations
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This reorientation of general education will have to be supported by a similar reorientation of economic education.
