Today’s standard economics – the economics dominant in classrooms and governments – misconceives causes and misses some of the main effects, good bad and ugly. That has consequences for how we understand history, how we make policy, how society views business and economic life and what they could aspire to. Its explanations fail and mislead at important junctures in modern history.
In the early 1800s, Britain and America saw a phenomenal “take-off” into sustained economic growth. By the late 1800s, Germany and France followed suit. The standard body of economic theory – making only references to “technical progress” – offers no real explanation of why explosion occurred then or at all. The theory makes no room for any creative internal forces that may have powered it.
Until economics is grounded on the basic character of modern economies – the ignorance, the uncertainty, and the new ideas for speculation and innovation – it limits and distorts our view. How could anyone in the economy form expectations about future prices and profits when future innovations, indigenous or foreign have not been imagined or tested in the market place?
In response, the Center on Capitalism and Society is endeavoring to build a modern economics of the workings of modern economies – how they got their dynamism, how they promoted economic inclusion and how the imperfect knowledge on which they operated opened them to healthy booms yet also to unhealthy booms and ensuing slumps. On these questions, work at the Center has already produced insights over this decade.
Now, the U.S. economy has long shown signs of a decline in “dynamism” – its capacity and urge to make indigenous innovations. The socio-political upheaval and resulting fears have made the economy worse. Neglect of business by banks, neglect of the long term by companies, and a drying up of venture capital all point to such a decline. The established theory does not and cannot encompass that decline since – having no room for human imagination, creativity, curiosity, and the unknown – it did not recognize the possibility of incorporating indigenous innovation to begin with.
By the 1980s, it became obvious that continental Western Europe did not have nearly the dynamism it had displayed in the 1800s and the 1920s. The continent’s postwar “miracle” was mostly catch-up, not dynamism. The U.S. retained its dynamism till the 1960s – with a surge during the internet boom of 1996 - 2004. Adherents of the established theory explain that the rise of the welfare state reduced after-tax wages, cutting the supply of labor. But this explanation is deficient. For one thing, when take-home pay moved to a slower growth path, private wealth piled up relative to wages decreasing the incentive to work.
In its early years, following America's brilliant innovation and joyous boom of the late 1990s, the Center saw modern capitalism to be the exemplar of economic dynamism. The recent crisis may not alter that judgment yet it has cast light on ways in which the financial sector may have diminished the economy’s dynamism and exacerbated the economy's speculative excesses. The Center has been studying a restructure of the financial sector that would make it less accommodative and less vulnerable to speculative swings and make it once again a key contributor to the dynamism and inclusion of the business sector.