Transcending Economies, Transcending Economics

Mass Flourishing

How Grassroots Innovation Created Jobs, Challenge and Change

Edmund Phelps

Princeton University Press

pp.378.

Mass Flourishing is a deceptive title for a remarkable book. While the title indicates that it would throw light on innovation and job creation, it is much larger. It covers several centuries of thought; has a range that touches economics but moves into politics, literature and philosophy; places short term events on a long timeline; helps understand the implications of a patchwork over the fabric of economies. All these are packed into a tight and gripping writing.

The book engages with the concept of a “modern economy”. How do we achieve happiness in a just and equitable society? The process of unravelling what a modern economy leads to a discussion of multiple economic ideas capitalism, socialism, Marxism, corporatism. All these ideologies are discussed in the context of economic growth, common good and happiness. While statistics help in parameterizing, Phelps draws upon art and literature to assess how people were perceiving the changes. These ideas are discussed in the context of a larger eco-system. Nothing happens in vacuum – even individual excellence and scientific discoveries and inventions happen at a time and place; the context is as important as the event.

Look at the following quote to understand where Phelps is coming from:

“Some might think to say that gifted inventors, even if untrained, were adding to scientific knowledge when their tinkering led to an invention. But these inventors did not create scientific knowledge any more than bartenders inventing new drinks create chemical knowledge: they lacked the training to do so. An addition to scientific knowledge occurred if and when trained theorists managed to understand why the invention worked. (It took a musicologist to see how Bach’s cantas “worked”).  (p.13)

So, what makes this modern economy? Where are the ideas coming from? Are they from the science labs? How do ideas emerge? How do we understand the non-pecuniary motives driving innovations? How do these ideas grow, and spread? These are difficult questions. But in these he sees the seeds of a modern economy, where ideas, innovation and invention were converted to economic products leading to an explosion of material benefits. The modern economy was about increase in productivity- resulting in fast and boundless growth. But the question was whether growth resulted in widespread benefit? While the numbers of rich increased, what about the wages of the unskilled workers? Were they benefitting from the innovation and the modern economy?

Phelps connects several unrelated events to trace the evolution of modern economy. The absolute and real increase in wages; reduction in incidence of disease because of advancement of science (elsewhere, and a result of international exchanges); reduction of poverty and pauperism. He then examines urbanization. He argues that rural areas only had under employment but not unemployment. But working for somebody, for an enterprise defined what employment was, and also sharply defined the phenomenon of unemployment. Urbanization was on the rise, because it was a worthwhile trade-off for the underemployed rural populace. In understanding this, Phelps not only uses data of that era, but also refers to Blake’s poetry and the image of “dark satanic mills”.

Urbanization was also about clustering. People went to places where there were new ideas, new challenges; industrial agglomerations. So the quality of life and moving out of poverty was not only the economic aspect, but the pleasure of encountering new problems and the satisfaction of solving them. The nuanced view he has about an assembly line is evidenced by this observation: “Charlie Chaplin’s image of the assembly line in his 1937 film Modern Times looked more mindless than oppressive” (p.52). Modern economy, while it brought higher wage and better financial returns, also had associated questions on impacts on mental stimulation.

Modern economies brought benefits in better health and longevity. Even the less advantaged had these benefits. This led to a different perspective: more time invested in equipping oneself and planning for a longer career. Going to a “work place” beyond the closed community relationships led to an “interchange” of ideas – where a large number of diverse people turned up. So what happened to people during these changing times? Here Phelps moves beyond data and uses literature – the ideas expressed in the works of Charles Dickens, Mary Shelley, Emile Bronte, Jane Austen, Balzac and Emily Zola. He moves from fiction to art and to music. The canvas gets bigger. His understanding of economies and economics is not purely dependent on trade, economy and monetary policy. He is questioning Ceteris Paribus (All other things being equal); arguing that all other things are never equal; we live in a dynamic world; and we pick up signals from multiple fields to understand the changing phenomenon of the dominant paradigm.

With innovation, modernization, longevity and better quality of life as a backdrop Phelps examines the other building blocks. These come from a larger eco-system. In discussing institutions, he examines institutions of governance (feudal systems, church, governments); institutions of justice; institutions that grant ownership rights on property. As the world moved from production based economies to idea based commerce, there was a need to protect intellectual property rights. Starting with intellectual property protection Phelps lays the foundation for modern enterprise to emerge. The emergence of the enterprise is not a pure function of innovation and risk taking. It needs an eco-system that provides protection for investments in ideas. This could come through patent laws that provide exclusivity to commercially use the ideas to reap the benefits of investments.

Just ideas and inventions do not result in economic phenomena. Protecting intellectual property makes sense only when there is a possibility of commercial exploitation of the idea. A commercial exploitation needs an element of scale. It has to move beyond the individual capability. Chartered corporations that undertook business with the backing of monarchies, laid the framework for a corporation. Initially Charters were set up with the intention of trade, exploration and colonization. However, as monopoly institutions with state support, charters did not have the agility to innovate and expand the horizons. It was a hurdle. Eventually this grew into the idea of a joint stock company. This provided the entrepreneurs the protection of a limited liability. The legal framework for this emerged in the United States and moved on to Great Britain and then extending all the way to Germany and France. This was followed up by better bankruptcy protection laws and a vibrant banking system.

On the political front, the movement towards representative democracy provided an ecosystem for accountability. Accountability to the electorate supported the interests of the underserved, and moved towards publicly funded education and opened support institutions. There were downsides to this, but the larger ecosystem for enterprise to flourish was more likely in a representative democracy than an autocracy.

While urbanization brought about unemployment, the modern economy brought taxation that collected money from the wealthy to provide social security for the deprived. This brought to the fore, the question of inclusivity. Does the modern economy and its growth provide opportunity for everybody to get employment and a share in the economic action? Phelps argues that if capitalism is working in the right spirit with other institutional mechanisms fostering innovation, the answer might be yes. But most of the time capitalism does not work the way it ought to – the governments direct the economic space in a manner that stymies innovation and free trade. This could happen if the state was a major actor as it were in the Chartered companies, and it could happen when the state resorts to corporatism – an arrangement when the state favours agreements with corporations and workers to create exclusive rights. While Phelps does not refer to India in this context, this could have happened in the licence raj, and might be continuing with crony capitalism.

Phelps argues that the age of innovation and mass flourishing happened between 1820s and the 1960s (the years of the great depression notwithstanding). He argues that this was a western phenomenon led by the United States and followed by European nations. He illustrates why China, though it had the ingredients of density of population, exchange of ideas, innovation and even enterprise did not keep up as it lacked economic institutions and economic culture (p.106).

Phelps goes on to discuss economic thought that was against the concept of modern economy – Socialism and Corporatism. He argues that neither the middle-income earners were pushed into the proletariat, nor did wage inequality appear to increase (p.114). The discontent with the modern economy was with the precariousness of jobs and wages – the episodic high unemployment and recession led job losses in certain sectors. Phelps sees socialism as a concept with inherent contradictions. Look at this quote of Sassoon that he reproduces:

“Socialism’s appeal, when it had one, was to say, at one and the same time, that its mission was to transcend capitalism while improving it; that everyone was equal by that the proletariat was the leading class; that money was the root of all evil but the workers needed more of it; that capitalism was doomed but the capitalists’ profits were as high as ever; that religion was the opium of the people but that Jesus was the first socialist; that the family was a bourgeois conspiracy but it needed defending from untrammeled industrialistion; that individualism was to be deplored but that capitalist alienation reduced people to undifferentiated atoms; that there was more to politics than voting every few years while demanding universal suffrage; that consumerism beguiles the workers but they should all have a color television, a car and go on holidays abroad.”

Phelps goes on to discuss economic thought that was against the concept of modern economy – Socialism and Corporatism. He argues that neither the middle-income earners were pushed into the proletariat, nor did wage inequality appear to increase (p.114). The discontent with the modern economy was with the precariousness of jobs and wages – the episodic high unemployment and recession led job losses in certain sectors. Phelps sees socialism as a concept with inherent contradictions, examining tension between socialist values and Western humanist values. While Phelps looks at socialism as an ideology to be debated and critiqued, he does not think that Corporatism has strong ideological roots. It could be the association of Corporatism with Mussolini and the fascist regime and it could also be that Corporatism is also anti-competitive in nature. However he engages with the concept at length, citing examples from Europe, where it evolved, how it grew and why it was not a positive thought for the modern economy. Phelps argues that corporatism was anti innovation, anti-enterprise and growth. He even indicates that the reason for the decline of the Western enterprise, particularly of the United States is because of the modern day corporatism. While recession and slowdown is seen as recent phenomena, Phelps traces this recession back to the 1970s.

The last section “Regaining the Modern” deals with the approach to taxation. Low taxation, heavy borrowing – and spending – both on welfare as well as a supply side Keynesian measure to maintain growth leading to very high fiscal deficit was unsustainable. Not only did the State borrow, but it encouraged corporations and individuals to borrow – in the hope that this would lead to growth and larger tax collections. That this did not work, is there for us to see.

The last section “Regaining the Modern” deals with the approach to taxation. Low taxation, heavy borrowing – and spending – both on welfare as well as a supply side Keynesian measure to maintain growth leading to very high fiscal deficit was unsustainable. Not only did the State borrow, but it encouraged corporations and individuals to borrow – in the hope that this would lead to growth and larger tax collections. That this did not work, is there for us to see. A high tax regime with a wider net gave State enough resources for funding infrastructure and public projects. A low tax regime, wider compliance and exemptions at the lower level resulted in an illusion of “reduction in take home inequality” but actually reduced investments in public infrastructure leading to the poor paying out of pocket for some services (education, healthcare) that should have been available in public domain.

This book is vast in its expanse, deep in its insight and philosophical in its approach. It is not only a must-read, but a must-multiple-read book. The canvas laid out by Phelps overwhelms you, but this is by far one of the best treatises written on the concept of a modern economy.