Mission

New ideas are the driving force of human experience – ideas about how things work, better ways of doing things and better things to do. The classical ethic of pursuing knowledge and experience has had lasting influence on how people choose careers and lead their lives. In the Renaissance and Baroque eras, new ideas of scientists and navigators led to discoveries which in turn created new commercial opportunities for entrepreneurs. The new good or methods – products, as we say today – came to be called “innovations.” Yet the economies in those two eras were themselves not appreciably creative. Interestingly, the discoveries did little to raise productivity, which in 1800 had sunk to the levels of the year 1000.
 
With the advent of the modern age in the early 1800s, new ideas have come more and more from within the economy. By now, conceptions of new commercial products that succeed in the marketplace are a large source of the world’s commercial innovations. New notions of an economy’s workings that are adopted in investment and financial decision-making constitute innovations of another kind. A modern economy in this sense has its own creative powers – its own inspiration, exploration and experimentation. In one hypothesis, the myriad advances achieved by practitioners, such as entrepreneurs and inventors in the business sector, push out the “economic frontier” far more than do the advances of basic science.
 
What enabled and encouraged economies to become creative is a question that has occupied historians for more than a century. Why some of today’s modern economies are systematically more innovative than others, when operating under standard or comparable conditions – in short, why they are higher in dynamism – is a central question for political economy. It is a plausible hypothesis that the answers to both questions are to be found in a country’s economic culture and its economic institutions.
 
History testifies that capitalist systems, if they are well-functioning in some basic respects, are extremely high in dynamism. They give every appearance of being oriented and structured for dynamism – businesspeople imagining new concepts and trying new departures, entrepreneurs trying these ideas in new products or methods, marketers conceiving of new niches for products, managers and consumers assessing novel products coming onto the market, and financiers with strategic vision judging which innovations are worth backing. The variety of new ideas on offer, the plurality of beliefs among financiers and entrepreneurs, and the diversity of consumer interests are clearly important to the dynamism of the system. So, evidently, is the “venturesomeness” of the participants, even managers and consumers.
 
The high dynamism of such a capitalist system, it has been argued, lifts the economy’s performance in fundamental ways – ways that may be crucial to its justification. It creates a sense of prosperity by creating a more stimulating, engaging and challenging workplace; and it creates fulfilling careers – the self-discovery and personal growth that come from ventures into the unknown that take us to a new place. High dynamism, it may also be argued, creates additional jobs and pulls up pay levels. (Whether it gives the economy an edge in productivity is unclear, because other economies may find it easy to copy the leaders.) In widening the number who can find a relatively rewarding job and can afford to take it over jobs paying more, high dynamism operates to raise economic inclusion. It may raise inclusion well above what it would be in “corporatist” and poorly functioning capitalist economies, which are weak in dynamism. The safety nets in those economies do not create jobs and so does not solve their inclusion problem.
 
Capitalist systems have other consequences, of course. A participant – particularly one taking advantage of the rights to innovate, to depart from the others, and the encouragements provided by the cultural-institutional background – has to act on the basis of one’s own theory and the expectations formed accordingly – just as supposed in the construction of “microeconomic foundations” for macroeconomics in the 1960s. Since every such theory represents imperfect knowledge of how the economy works and will give importance to the thinking of others, “speculative excesses” may result: overshooting, gold rushes, bank runs, credit crunches. As a consequence, the system is vulnerable to crisis, with an ensuing toll in jobs lost and insolvencies. Needless to say, such episodes depress economic performance.
 
The established body of formal economic theory – intertemporal, information-theoretic and game-theoretic – captures neither the dynamism and its rewards nor the vulnerability to crisis. That theory cannot capture dynamism since the theory contradicts its existence: the theory implies a deterministic future – however buffeted it may be by stochastic shocks – in which nothing is left that is not already known while capitalist systems are evolving, unruly, open-ended systems that dictate an indeterminate future. (The established theory allows only the probabilistically predictable “innovations” arriving from known stochastic processes. There is no dynamism, no intuition, insight or creativity.)
 
Popular understanding and policy analysis demand explanation of events, however. An odd mix of conventional views has filled the vacuum left by existing formal theory. According to these views, the U.S. economy is all about goods, from consumer goods to capital goods – and jobs that pay wages to buy them – with no awareness of the experiences and development that people get out of the processes involved; wages are pulled up by scientific advances, not by the advances, small and large, taking place every day within the economy; finally, employment is pumped up, as if through a hydraulic action, by purchases of goods, including government purchases. These views are formidable block to discussion of economic policy.
 
The Center stands for a modern theoretical perspective, one that emerged briefly in the interwar years of the 20th century. In this perspective, our knowledge about a modern economy, in which any individual may and sometimes does depart from past practice as his or her own conceptions change, is bound to be “imperfect” – all the more so when innovative processes are in motion and new products are unfolding. The Center is oriented to the construction and the use of genuinely modern models of modern economies – models that respect the fact that the future would not be fully determinable even if all exogenous shocks pinging the world’s economies were to halt. As long as the global economy possesses a significant degree of restless dynamism, this economy will play a role in shaping its future – yet in directions that we cannot foretell to any great extent.
 
The substance of the Center’s interests are nicely conveyed, up to a point, by our mantra of dynamism, inclusion and speculation. We study the mechanisms of dynamism of capitalist systems. We study the mechanisms at work in asset valuations and resulting speculative processes. We also study the mechanisms determining the degree of economic inclusion. Yet much of this research is sparked by the burning issues of our times.
 
How do the advanced economies compare in economic dynamism and economic inclusion? Why is it that some of world’s modern economies, such as many in continental western Europe, significantly lack economic dynamism? Is the capitalist system in the U.S. functioning better, as some of its champions say? Has U.S. dynamism, for whatever reasons, recently been in something of a decline? Can capitalism’s strengths be enhanced? Can public policy or some self-correcting methods address its weaknesses?
 
Now higher than ever on the agenda are the issues of how to rein in speculative excesses without stopping healthy booms. We all agree that a better design of incentives and of whole institutions is needed to curtail self-dealing, short-termism, loss of transparency, etc. Yet we also agree that it is necessary to have a basic understanding of the mechanisms of asset price speculation – an understanding far beyond the misguided premise of “rational expectations – if we are to become capable of regulating “systemic risk” in the global economy.
 
Plumbing deeper, we run into fundamental issues not often faced. How are we to do microeconomics and macroeconomics once we recognize that households have motives beyond maximizing goods and reducing hours worked; that they reach out for personal growth, adventure, overcoming obstacles and finding new sources of fulfillment that unfold over time? And what, exactly, is the good life against which to measure economic performance?
 
Also on the Center’s agenda is the dynamism and inclusion of countries that, so far, lack a modern economy. Why does development fail to start? Or restart after a crisis? What kind of macroeconomic framework and microeconomic foundation, including institutional, legal and regulatory systems, are needed for viable and inclusive economies? How can “aid” be reformed to create dynamism and inclusion?
 
Getting our theory right will be necessary for a workable understanding of the world in which we live now. It will be crucial for thinking about a great many policy issues of our time – from reviving the dynamism of the U.S. business sector and reforming the financial sector to fixing Afghanistan and addressing failures of economic inclusion in some continental European countries. “There is nothing so practical,” it has been said, “as a good theory.”

The main purpose of the Center on Capitalism & Society is to analyze what determines a country's ability to generate and select innovative ideas and create an economy that is both dynamic and inclusive. For this to be possible, a stable and effective financial sector is imperative.

The Center was conceived in response to a long-unanswered question in economics: What strategies or historical accidents explain the remarkably high prosperity and productivity generally observed in the American economy over the last century? Although economic historians have nominated several explanations—the work ethic, Yankee ingenuity, and the beckoning frontier—modern economics suggests the answer may have lied in America’s system of economic institutions and attitudes. Survey data on attitudes towards responsibility, teamwork and risk-taking often are better in explaining differences in performance among countries than institutional factors such as employment-protection laws or the generosity of employment benefits.

In capitalist economies with a stable and effective financial sector, the implementation of new ideas is boundless because either they do not require technological advance or they induce the advance they need themselves. Their formation, development and adoption lift a capitalist economy's performance in most dimensions: productivity and pay, job creation and job rewards—mental stimulation, intellectual development and personal growth.

Yet, such new ideas raise difficulties owing to “Knightian uncertainty” about their value. [Frank Knight argued that that the capitalist economy suffered from “unmeasurable” risks which he called “uncertainty.”]. Part of the Center’s research agenda focuses on modeling the processes by which the entrepreneurs and financiers of capitalist economies generate and select new ideas for try-out and the ways in which consumers and producers manage to evaluate the new products and methods. Such models help us to evaluate how some types of economic institutions and attitudes might give better performance than others.

At the same time, most economists in recent decades have pretended that the capitalist economy is essentially predictable and understandable. Member of the Center have done extensive work on refuting such idea and questioning the “financial engineering” and “rule-based” monetary policy that ignored uncertain knowledge.

With the global financial crisis that has hit the United States and continues to grip the world economy in many and diverse ways, the Center is now focused on analyzing the origins and mechanisms of this crisis. The Center is organizing seminars, conferences, and media events to contribute to the differences of opinion about the main forces at work and, accordingly, to debate the most needed remedies. No country in the world has been untouched by this crisis and a main challenge in all of them is to reactivate economic dynamism and social inclusion once the financial sector has been restructured and stabilized so that adequate credit can be restored.