New ideas are the driving force of human experience – original ideas about how things work, about other ways of doing things and new things to build and try out. Consequential ideas began arriving relatively frequently with the civilizations of the ancient Babylonians, Indians, Mediterraneans and Chinese. The Aristotelian ethic, which viewed pursuit of knowledge as central to the good life, encouraged careers of investigation and exploration. Notably in the Renaissance and Baroque eras, new ideas of scientists and navigators led to discoveries which in turn created commercial opportunities for entrepreneurs. The new goods or methods in use – products, as we say today – came to be called “innovations.” Yet the economies in those two eras were themselves notappreciably creative. Interestingly, these storied discoveries did little to raise productivity, which by 1800 hardly exceeded the levels in the 1100s.
With the advent in the early 1800s of modern times, new ideas have come more and more from within the economy. By now, the discoveries resulting from new conceptions and intuitions originating in the business sector are a major source of the world’s commercial innovation. Thus, a modern economy has its own creative powers – its own inspiration, exploration and experimentation. Some economists believe that that the myriad advances achieved by practitioners in the business sector push out the economic frontier far more than do advances in basic science.
What enabled and encouraged economies to become creative is a question on which historians made little progress for more than a century. And it is still a hotly debated question why some of today’s modern economies are more innovative than others at least when operating under comparable conditions – in short, why they are higher in dynamism. 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. However, economic research on these and related questions goes back only to the early 1920s and has seldom involved more than a dozen investigators.
The Center was formed in 2002 to identify and study the workings of well-functioning modern economies, past and present: how these economies got their dynamism; how the projects to achieve innovations, in rendering existing knowledge insufficient, turned a growing number of jobs into obstacle-surmounting, problem-solving activities; how the uncertainties generated by innovative activity left asset prices more up in the air than they were in the mercantile era; and how the relatively high dynamism of a relatively modern economy impacts employment – in good jobs and not-so-good jobs. Now some observers have pointed to signs that modern economies have lost some of their dynamism – the western continental Europe’s economies after their 30 glorious years of “catch-up” were over and the U.S. economy after its Internet boom was over. So the Center faces the question of what policy measures might best help these economies regain some of their loss in dynamism and what would be justification for such action or for inaction.
We have little idea whether new forms of the modern economy will emerge in the future. It is no longer disputed, however, that capitalist systems, where they have been well-functioning in some key respects, have set records for dynamism. They have given every appearance of being structured for dynamism: businesspeople imagining new concepts and departures, entrepreneurs trying these ideas in new products or methods, marketers conceiving of untried niches for products, managers and consumers assessing novel products coming onto the market, and financiers with strategic vision judging which innovations are worth backing. But what in that system, in its heyday at any rate, made it so dynamic? And what has the system delivered in the way of “final goods” – the primary goods on which we judge a country’s overall economic performance? The answers are not obvious, the phenomena of interest are not all observable, and the subject not cut and dried. The Center’s mission, it may be said, is to provide some theory to serve as lenses with which to view the social effects of modern economies and to bring to bear some moral standards or social values with which to judge the consequences for economic performance.
One theory stressed by some at the Center is that the variety of new ideas on offer, the pluralism of beliefs among financiers and entrepreneurs, and thediversity of consumer tastes are crucial for the dynamism of the system. Another theory proposed in one or another version at the Center is thatpreparedness, pioneering spirit and venturesomeness on the part of end-users – the owners or managers of proprietorships and companies who decide whether to use a new product and the individuals or families curious to try new consumer goods – are necessary for new products to be adopted and thus innovation. Yet another theory found at the Center is that the innovational capabilities of the business sector require that the “creative” people and the entrepreneurs have the imagination, strategic vision and “animal spirits” – much of it fruit of their experience – to envision and embrace new product concepts that have a significant chance of commercial success. Of course, dynamism cannot amount to much if the financial sector, for all its pluralism, does not serve the business sector.
The theoretical perspectives found at the Center suggest that the relatively high dynamism of genuinely modern economies, though it is not an end in itself, indirectly lifts the economy’s performance in ways that are ends and crucial to the justification of modern economies. High dynamism produces a sense ofprosperity by creating a more stimulating, engaging and challenging workplace. And it produces fulfilling careers through the self-discovery and personal growth that come from ventures into the unknown – ventures that take us to a new place. The higher dynamism of a more modern economy, it may also be argued, raise employment in a wide range of jobs and pulls productivity and pay onto higher paths too. Creating more job opportunities and widening the number of workers who can afford to take the more rewarding job over the one that merely pays better both serve to broaden economic inclusion. (Whether a nation’s decision to go for increased dynamism would close somewhat the gap between its productivity level and that of the league leaders is unclear, since it might be more “cost-effective” for the former to copy the leaders – but at a sacrifice of prosperity, fulfillment and inclusion.) Thus the more modern economies may tend to have inclusion levels distinctlyabove those in the more traditional economies, such as the “corporatist” and “statist” ones, and those in the more poorly functioning capitalist economies, which are weak in dynamism. The safety nets instituted in those relatively traditional economies treat the symptoms of low inclusion but neither create new jobs nor enliven existing ones so as to solve their inclusion deficiencies.
Even well-functioning capitalist systems have a downside, of course. Those who take advantage of the rights to innovate – to depart from the others – and of the encouragements provided by the cultural and institutional background have to act on the basis of their own theories and the expectations formed accordingly, precisely as supposed in the construction of “microeconomic foundations” for macroeconomics in the 1960s. Yet every such theory represents imperfect knowledge of how the economy works, so it wisely allows for the importance to the thinking of others – what Keynes called “conventional judgment.” Speculative excesses may result: overshooting, excessive borrowing, bank runs, credit crunches. (I buy because I see some others eager to buy and they may know something I do not know.) As a consequence, the system is vulnerable to financial and economic crisis, with an ensuing toll in jobs lost and insolvencies. Needless to say, such episodes depress economic performance.
Unfortunately, real-life economies that operate on a capitalist system may suffer from a political failure to address the pay of the less advantaged participants in those economies. But the observations around the world clearly show that this moral failing is not unique to those economies. Plenty of real-life economies operating on a more corporatist or statist system show the same disregard or ignorance in the polity for shortfalls in economic inclusion.
The Center and the prevailing economic theory. 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.
The public and policy analysts want explanation of events, though. An odd mix of conventional views has filled the vacuum left by existing formal theory. According to these views, even the most advanced 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.
In contrast, the view of advanced economies taken by the Center derives from the modern theoretical perspective, which first emerged 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 departures and ventures of a modern economy (also those of other modern economies in the global system) make that economy’s future not fully determinable – neither by the participants making decisions at the time and nor by historians later on. No one can foresee the directions in which modern economies will go.
The subject of the Center’s research might be summarized as dynamism, inclusion and speculation. The subject matter is the mechanisms of dynamism of capitalist systems, the speculative processes at work in asset valuations, and the mechanisms of economic inclusion. The main purpose of the Center on Capitalism and 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.
The questions before us. The Center was first conceived as an effort to rescue economics from its inapplicability to central questions about economic systems and economic policy generally - questions about finance, asset prices, investment decisions and the experience of business life. In recent decades especially, most economists have pretended that the capitalist economy is essentially predictable and understandable. Member of the Center have done extensive work on refuting that misconception and challenging the “financial engineering” and “rule-based” monetary policy that ignored uncertain knowledge. Some economic historians have supposed that the high prosperity and productivity generally observed in the western world in the 19th century was the result of the work ethic or Yankee ingenuity or the beckoning frontier. Modern economics suggests the answer may have lain 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.
Yet today the Center’s research is also sparked by the burning issues of our times.
- Do those among world’s more advanced economies – advanced in terms of productivity – that suffer low inclusion owe the problem to their “welfare state” and the taxes to pay for it, as the neoclassical school claims, or, rather, to a deficiency of dynamism?
- Has U.S. dynamism, for whatever reasons, been in decline for a decade or more? If so, can some self-correcting processes be depended upon to repair the loss? Or must dynamism be recovered through governmental or other extra-market initiatives?
- Are today’s challenges in health care, climate change, energy, and food and water security all so immense and systemic that governments would be no worse than modern markets at picking “winners”? If governments take the initiative, acting as sole financier or sole customer or sole inspiration, how deeply will that cut into overall dynamism, which has always fed on the diversity of ideas, financiers and end-users at the grassroots?
- How can nations limit speculative swings without stifling every healthy boom? A better design of incentives and whole institutions are needed to curtail self-dealing, short-termism, loss of transparency, etc. Yet a basic understanding of the mechanisms of asset price speculation – one going far deeper than the misguided premise of “rational expectations – is also required if we are to become capable of regulating “systemic risk” in the global economy.
Plumbing deeper, the Center faces some underlying questions.
- How are we to do economics, both micro and macro, 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?
- What to do about the lack of modern economies over so much of the world? Why does development fail to start? Or restart after a crisis? What frameworks, with their institutional, legal and regulatory components, would nourish dynamic and inclusive economies?
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 economy to building systems offering engaging work and rewarding careers in the more dysfunctional economies of the Middle East. “There is nothing so practical,” it has been said, “as a good theory.”