A new book by economics Nobel laureate Edmund Phelps and his team of collaborators offers a fresh breath of air to stale debates about how to restore long-term growth in advanced economies — although it does so less by the persuasiveness of the answers it gives than by the convincing nature of the questions it wants us to pose.
Dynamism is bookended by Phelps’s own essays, which reprise his longstanding interest in innovation as both a constituent and consequence of social and economic modernity. His thesis includes two thought-provoking points. First, that innovation is not simply a matter of developing commercial applications from “exogenous” scientific discoveries as the Schumpeterian tradition — and much of standard economic theory — would have it, but rather the “bottom-up” consequence of creative individuals seeking and finding better ways of doing things as they actively seek change in their own lives. Second, that their ability to do so is influenced by culture, values and institutions, with the most “modern” values and attitudes most conducive to innovation.
The first claim is an antidote to the pessimistic view that we have run out of important discoveries, associated with economist Robert Gordon’s analysis of the secular productivity decline. The second provides Phelps’s alternative explanation of that decline: that productivity growth from “indigenous innovation” has dried up because societies no longer facilitate individual creativity in the way they once did.
Phelps’s perspective is a necessary complement to the standard intellectual frameworks that tend to guide policy thinking around innovation and productivity growth. Conventional economics causes a blind spot to the attitudinal and cultural factors Phelps thinks are essential. Whether he is right or not, it is clearly wrong to rule them out of consideration altogether.
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His iconoclasm shows by example how economics can benefit from an open-mindedness to broader social thinking. Not many economic studies reference David Hume, Henri Bergson, Friedrich Hayek, and Michael Polanyi.
The meat of the book consists of a series of empirical and theoretical studies carried out by Phelps’s long-running research centre at Columbia University, aimed at probing, and no doubt ideally underpinning, his theses. Like them, these explorations are eclectic, ranging from mathematical derivations via econometric estimations to an interview-based case study of Icelandic entrepreneurs. Not all of them hit their mark.
The team’s work on measures of total factor productivity (TFP) — or how much an economy manages to produce from a given amount of labour and capital — is particularly useful. As the book says, of all the ingredients in the formula for economic growth, “TFP is the most mysterious and most intangible one: as the residual in a growth regression, it stands for little more than the ignorance of economists”.
Phelps and his team reduce that ignorance by dividing TFP growth into “indigenous” and “imported” productivity increases, where the latter involves learning from the most advanced economy, and the former reflects domestic innovation.
Examining these over long time periods yields insights. The team finds that the economies generating most indigenous innovation for most of the 20th century includes not just the US, but also France before the second world war. In the past few decades, the book finds Nordic countries almost as innovative as the US, but does not remark on the exception: they consistently measure Norway as delivering little indigenous innovation.
These promising measurement exercises are unfortunately marred by unexplained inconsistencies. Some tables show France nearly equalling the US’s pace of innovation throughout the 1950s and 1960s with the UK near the bottom; in another, the ranking is the opposite.
The attempt to quantify values and their effect on innovation also throws up puzzles. Their indexes of modernism and traditionalism, for example, say Sweden was much less modern than Ireland and much more traditional than Italy in the early 1990s. This makes it hard to know what to do with the subsequent finding that “modernism” boosts innovation. In any case, it is hard to believe that values can change fast and erratically enough to explain the frequent changes in their innovation rankings over longer periods.
These shortcomings, however, mean that if Dynamism’s thesis is not proven, it is also not disproved. The questions it asks, therefore, remain worthy of pondering.
The reviewer is the FT’s European economics commentator
Dynamism: The Values That Drive Innovation, Job Satisfaction, and Economic Growth, by Edmund Phelps et al, Harvard, $35/£28.95/€31.50, 256 pages
Source: Economy - ft.com
