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.
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. 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 'til the 1960s – with a surge during the internet boom of 1996 - 2004. We see clearly these days a welter of disturbing statistics dating back to the late 60's or early 70's. Foremost is the stagnation of productivity. That stagnation has led to depressed rates of return to investment, sluggish wage rates, stagnant income generally, bloated levels of household wealth relative to wages, an explosion of public debt and more.
The Center has been asking whether the Renaissance values of individualism, vitalism and expressionism – that seem likely to have finally sparked the dynamism exhibited in the 19th century – have been on the decline since the late 60's, and whether such a decline lies behind the slowdown of innovation in America, France, and Germany beginning in the 70's.
Although the research findings at the Center are necessarily tentative, early results suggest that a prospering and flourishing society requires not only institutions to facilitate innovative activity but also a population imbued with the modernist values arising in the late Renaissance and endowed with the wisdom to avoid public policies that restrict initiative and distort incentives.