Center Director Edmund Phelps gave two recent interviews about dynamism, innovation, and post-pandemic economies: one with Juan Vicente Sola on November 20, 2020, hosted by El Clarin for the 10th Phelps Congress, and the other on November 28, 2020 with the program Hey China!
To view videos of both events, see right. The English transcript of the El Clarin interview is below.
English Transcript: El Clarin
Danil Fernandez Canedo – El Clarin
Juan Vicente Sola – University of Buenos Aires
Edmund Phelps – Nobel Prize in Economics 2006, Columbia University Center on Capitalism and Society
Juan Vicente Sola: To start, tell us, what is economic dynamism, what does it achieve, and what values are needed to get it?
Edmund Phelps: By economic dynamism I mean when a society is full of people with aspirations to create new things. It’s all about exercising creativity. We are all born with creativity, but most of us are not in societies that allow us to use it. Exciting things happen when creativity is exercised in companies. And that creativity, with some luck, leads to innovation, so you get productivity gains as well as satisfaction from the process of creating.
Mass Flourishing is about the amazing rise of that phenomenon in the 19th century – in Britain early in the century and then in America somewhere in the middle and later France and Germany – an explosion of innovation! It was not mainly scientists making discoveries and it was not only one person doing it: It was a lot of people from the grassroots of society on up who were imagining a better way to do something, a better product to try out in the market. You had in the 19th century this amazing phenomenon of dynamism, and I’ll come to that later but we lost a lot of that dynamism in the 20th century.
But going back to the rise of this dynamism: Where did it come from and why did some countries flourish and not others? My answer is that when this dynamism ultimately arose, it was in countries that embraced the humanist values that came out of the Renaissance and Reformation. Those intellectual shifts encouraged people to exercise individualism and use their talents to express themselves. Then there was also a spirit of vitalism: of trying things, of accepting challenges – also needing to have problems to work on. I think of the two characters in Don Quixote: they needed challenges and problems in order to have meaningful lives. So you have all these traits, and what caused these traits are the values that I mentioned earlier.
Danil Fernandez Canedo: Now, we are in the middle of a technology revolution which also requires people to exercise their creativity. Is this technology revolution similar to the industrial revolution of the 19th century that brought dynamism and mass flourishing to several societies? How will this technological leap effect the creativity of humanity?
Phelps: Well, first of all, yes, we are witnessing marvelous technological developments. But they are mostly in a small part of the economy: Silicon Valley. The gross domestic output from the labor and capital working there is only about 5 per cent of the national output. It’s a very small part of society that is involved with Silicon Valley and its offshoots. And it’s a very small part of the economy that is experiencing productivity gains and great jobs. So, yes, we’re going to get to see some very interesting developments out of that, like robots and artificial intelligence. That, of course, is a story by itself. There are also a lot of people who are worried about that. The change doesn’t seem to be a good thing at first.
Yes, robots may displace a great many employees and lower wage rates as a result. But when wage rates go down, profits are pulled up, and when profits go up, that creates new opportunities for investment, which pulls wages back up. So, the loss of jobs and decline of wages caused by robots replacing workers is a short term consequence and not a long term phenomenon. I give the example of what happened in the U.S. when millions of people came from Europe and entered the North American economy during the second half of the 19th century. Did they drive down wages? Sure, this put wage rates on a lower path for a while but then increased profitability and the availability of more labor brought more investment activity to make use of the additional labor. So there was no long-term depression, no long-term effect on wage rates.
Canedo: What do you think the world economy will look like following the coronavirus pandemic?
Phelps: Of course, the COVID-19 crisis is a horror, and we’re not going to come out of that unaffected – we are in various ways hurt by it. I think as we emerge from this, as governments succeed in dealing with the problem and we look to get back to normal operations, one of the things we’re going to have to do is to improve international economic relations. Today, we have countries at each other’s throats. There is tension between China and the U.S. So I think that one of the problems that has to be solved in the post-pandemic era is the reconstruction of international relations.
Sola: Sadly, the Trump presidency has led to conflict between the U.S. and China, but also before there were conflicts between the U.S. and sectors of Latin America. You published an article recently “The Economic Case for Biden.” Do you think Joe Biden is prepared to repair some of these relations?
Phelps: Well, those are two questions. I think that President-elect Biden is a good choice to help the United States over the next four years. He has a tremendous background and experience that few people have in the country. He has a huge reservoir of goodwill, and is not out to harm people, so I don’t think we could possibly find very much better than Joe Biden at the helm. But, of course, as time goes by, we’re going to badly need some vision, and we’re going to badly need to know what levers to pull. Here I think I’m as much in the dark as anybody else. I’m hoping that there will be a restoration of competition in the economy. I think that’s important. We all agree that some great things came out of Silicon Valley, but unfortunately, what has developed is five huge monopolies with tremendous power. And we have to deal with that if we’re going to be able to resume rapid productivity growth in Silicon Valley. So there are, no doubt, many, many things that Biden will have to do, but I think he will address them one by one. I certainly hope so.
One area is medical care for the less advantaged. Here there are many voices arguing for different initiatives. Some people think that medical care for all—essentially, low-cost medical care or zero-cost medical care—is fundamental. I don’t have anything against that. I certainly see the value of that, of course. But, we do have to recognize that there are other costly claims on the revenue of the government. And we badly need to pull up wage rates at the low end of the labor market. It’s a tragedy and a shame that, at the low end, wage rates are so small that people cannot have even a decent life.
So we need to institute economic justice in the distribution of the fruits of the economy. That seems to me to be basic. I would hope that with Biden, with a new voice in Washington, we might make some progress in that direction.
Canedo: Professor, you spoke about five monopolies, about social assistance, and better wage rates at the low end for people in the West. When the economy gets out from the effects of the coronavirus, is it possible we are on our way to a new capitalism?
Phelps: I think that if we could subsidize employment of low-wage labor – those least advantaged, those at or near the very bottom – and in that way pull up their wage rates, that would be a major achievement. That would be a revolution. But as I was saying, all these things – wage subsidies, free medical care, free housing – to a certain extent rival each other because there is only so much tax revenue that can be raised. These are thorny issues that economists are far from united on. What is our taxable capacity? How much more tax revenue can we generate? We can raise taxes more, but not a tremendous amount.
There is also the problem of the environment – environmental justice. That is going to cost money too. So it’s a fascinating time. We’ve put off a lot of these decisions for 20 or 30 years and it seems to me that now we have to face them and start to solve these problems.
Sola: We are very concerned in this part of the world about the relationship between China and the U.S. In resolving the conflict created by Trump with China, we will see what role China will have in the future of international trade. Will we return to a system like the WTO and impose more strict bilateralism? This is a challenge though because in this part of the world the great figures are the U.S. and China – and a conflict between them puts South America in the middle of it.
Phelps: I understand. In a way, that’s the fourth problem, isn’t it? It’s a stupendous problem. You’ve put a lot on my plate there. There’s a line like that in a great Harold Pinter play – “that’s not my field.” For sure, Biden and Xi Jinping will both want to have better economic relations. My friends in China are yearning for that, and plenty of American economists would like to see that too. But we have to face the reality that there are going to be some unresolvable differences between China and America at the present time. I think President-elect Biden will be pretty tough with China on a lot of military matters and technological matters. I don’t think, in those respects, he’s going to make it easier for China. But, on the other hand, I think there are lots of things that Biden will be happy to do to get rid of a lot of the stupid initiatives by Trump. There is a lot that Biden can do to make the Chinese happier and Americans too. But there are some problems that are hard nuts to crack. As long as those problems last, they are going to create tension between China and the United States. Perhaps the tensions over military matters are not a problem for South America. Regarding the topic of trade and business relationships, it seems to me that these relationships can and will certainly improve – but maybe not to the extent that many people would hope.
Sola: The essential material of an economy with high dynamism is not bricks or electrons. It’s ideas that either fail or succeed in the market? But what must we do to generate those ideas?
Phelps: You and I have talked about this before, Juan. One of the themes in my book Mass Flourishing is that in Europe, “corporatism” rose up, early in the 20th century, and this corporatism became a burden on innovating – it got in the way of innovating. The rise of corporatism, primarily in Italy, and in other places in Europe, I think, was an important contributor to the slowdown of innovation in Europe the middle of the 20th century. And that corporatism also came to the United States with some of Roosevelt’s measures. But it was on a small scale, not in a big way, and towards the end of the 1930s I think everybody decided it was a bad thing. But this corporatism idea, it’s an idea that society, and hence the economy, is one body, and somebody’s got to lead this one body, and that’s the leader who then sets the course for the economy and society. (Juan, you are a great scholar on this subject!. In fact, you are the leading scholar in the world on this subject.)
That corporatism has not entirely left us. And I think Trump is an example, a perfect example, of a corporatist. He thinks it’s the prerogative, maybe even the duty, of the President to tell the corporations what they have to do. It’s one of the most amazing phenomena seen in recent years. Early on, almost as soon as President Trump took office, I was saying in public – at a meeting in Chicago of 1,000 – that President Trump reminded me of Mussolini. And that impression was only strengthened throughout his presidency.
What we badly need to get back to is the idea that in an economy based on true capitalism, a corporation is permitted to choose its own destiny and have a lot of fun doing it, and make a profit in the process. “Capital is king,” as Leszek Balcerowicz put it. That kind of thing is great for the entire economy and the entire society from the bottom on up. We need to encourage the exercising of creativity. The last thing we want is an economy where corporations can’t do anything without the okay, or permission, of the President. This is not my area, but in South America there is quite a lot of corporatism, too. The interests of Government and businesses are intertwined.
Sola: Following your words, you consider economic corporatism to have originated in Italy and is a cause of economic stagnation of our region. In that, I can only agree, but the reality of this issue is how does a country get out of an over-regulated society where everyone finds a place and where the government, large companies and large unions somehow distribute economic activity? How do we get out of a stagnated society and enter an open and pluralistic society and at the same time increase economic dynamism which we did not find in many place in this region of the world?
Phelps: I wish I had a recipe for that. I’d be happy to send it. You have expressed so well what needs to happen. But then you are asking me now about the problem of what to do to reach that kind of society – what steps to take, what economic steps are needed. I think it has to begin with understanding the problem: making everyone understand that corporatism is not good for us – that it’s bad for us and stopping corporatism is the necessary first step.
Maybe the country, and maybe schools, should be looking at companies and the history of companies where the rejection of corporatism led to better things and school kids can study the consequences of what happened when corporatism developed in the countries that it did. First of all, we must persuade people in Latin America that heavy-handed government with its fingers in the economic pot is bad – that it’s a barrier to creativity and thus innovation and hence burdensome to job satisfaction and to economic growth. If you can do that, that’s half of the battle.
Beside that, I often think it’s good that young people in school have exposure to the history of the sensational economies that appeared in the 19th century and that did pretty well right up until somewhere in the middle of the 20th century. These success stories ought to be studied, and the failures ought to be studied.
Canedo: Professor Phelps, in this sense you spoke of the good of opening world trade between China and the U.S, that with the government of Joe Biden, a new stage can be opened. It is believed that China has the second economy in the world. In the coming years there may be changes in which economy leads. Will China surpass the U.S. in innovation?
Phelps: I think there’s no doubt how China is doing—every decade, China seems to do better than we expect. My impression is there’s quite a lot of innovation going on. Much more than 20 years ago. I was able to go to China a lot in the year 2000. They hardly understood the word innovation. They would only speak of enterprise. They understood making money. But creating new things was foreign to them. Everything was about making use of existing technologies to produce at lower costs so that earnings could be higher. This was in 2008. Now, I don’t think they think that way anymore. I think they know it’s important. There are opportunities in China to use the creativity of Chinese people to conceive new things, develop new things and bring them to market. I think every society has creative people—all of us, most of us anyway, are full of creativity. China is no exception to that. If anything, the Chinese people are relatively creative. So what China needs is to persuade itself that it’s got to go ahead and engage in innovation. And, well, sometimes it doesn’t work out. But you’ve got to do that in order to achieve indigenous innovation.
Early on, I emphasized that the success stories in Europe and the United States were not success stories about individual people who were unique, different from everybody else. The tremendous rise of productivity, and the emergence of new products and new ways of producing – those came from people of all walks of life, down to the grassroots, I like to say. I think the Chinese have gotten that message. I think that a company doesn’t hire an innovator to produce innovations. A company draws on the creativity and the will to conceive new things. In the past 2, 3, or 4 years, there has been an outburst of new corporations forming in China—and I don’t think that it’s just people who want to work for themselves and have no aspirations and dreams. They are willing to take risks and are willing and eager to try to conceive of new products. South America needs this change of attitude. I think South America needs to work through the same things China has been working through.
Sola: What values does a society need for dynamism? What values should we develop not only in schools? What values should politicians, judges, officials and entrepreneurs hold? What values symbolize the change you propose?
Phelps: In Mass Flourishing, I answer the question, what is this magic elixir. I came up with three things – I’m sure the book includes several more things – but one is individualism. People ought to feel motivated to express themselves, express their individuality, to create something that is their own idea. And they do it for the good of society. It is not something selfish on their part to express their own talents. It’s good for them, but also good for the rest of us. That’s one humanist value – one that is so, so important. I hate to see individualism treated as if it’s synonymous with selfishness, thus some kind of sickness. When people start to think like that, forget about it, they’re not going to get any progress. Another thing is vitalism – drawing on your energy, accepting challenges—which is very, very important. I think, also, it’s important for people to feel that they can go on a voyage into the unknown. It’s just so exciting to be in a society in which you have little idea what it’s going to look like 10 or 20 years into the future. If people have that thrill, of being involved, being part of that—that’s very exciting, very rewarding.
Canedo: This is very interesting. Some of this has been built or arises many times by spontaneous generation but there are areas of the world in which there are creativity niches of good Quixotes like you. Are there individual policies that generate that?
Phelps: I don’t think there are any policy levers that you can turn, or a button one can press to learn. I do believe that the educational system is very important. You’ve got to teach young people about the heroes of the past, not military heroes but social heroes—people who make change for the better. My goodness, there are so many wonderful stories there. I think that the great books, with their stories of heroes and creativity, should be read in high schools, and maybe in some basic university courses. The most important thing that happened to me in my university education was my freshman year at Amherst College where I had a whole year, nine months, where I had to read a vast quantities of the humanist literature. I came out of that stirred to think perhaps I could make a difference, however small.
Canedo: What does it feel like to be a Nobel Laureate in economics?
Phelps: Oh, of course it felt great to win the Nobel prize. Everybody says so. I don’t know of anybody who says it doesn’t. It is awfully valuable to have achieved that. It bolsters one’s confidence. It makes one feel that, well, people have appreciated what I’ve tried to do. I think that encourages the Nobel winner to continue and make new discoveries and create new theories. I think I’m a much more economist after the Nobel prize than I was before the Nobel prize.