Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change

October 28, 2013


JOANNE MYERS: Good afternoon. I'm Joanne Myers, and on behalf of the Carnegie Council, I would like to thank you all for joining us.

It's a privilege to welcome Edmund Phelps to this Public Affairs program. His reputation for being one of the most thoughtful and creative economic thinkers of our time precedes him. This afternoon he will be discussing a topic that should be of concern to most of us, but especially to our government and its leaders. The question is, what makes nations prosper, and why is the source of that prosperity under threat today?

When a country's economies are teetering, when unemployment is on the rise, economic protests are the rage, and deficits abound, invariably it's only natural that we would long for those halcyon days when there was a sense of well-being and job satisfaction was the norm. It's not surprising, then, that we find ourselves asking what can be done to turn the economy around. What can be done to recapture the dynamism that once was in places like Britain and America and elsewhere in the late 19th century, but has generally slowed since the 1960s?

For some time now, Dr. Phelps has been thinking about these issues. In many ways, his book, Mass Flourishing: How Grassroots Innovation Created Jobs, Challenges, and Change, is a distillation of years of research spent investigating the conditions of economic growth, changes in values, and attitudes that once unleashed wide-scale creativity and risk-taking. In Mass Flourishing, our speaker talks not only about the advent of modern capitalism, and the enemies of modern economy, but he also provides a new perspective on what prosperity means for a country, what values are important, and, in the end, what it means for an individual to create, flourish, and recapture that entrepreneurial spirit that once was so prevalent.

But how does one reclaim the values that once served us so well? For inspiration and direction, please join me in welcoming a very distinguished guest, the winner of the 2006 Nobel Prize in Economic Sciences, Dr. Ned Phelps.

Thank you for joining us.


EDMUND PHELPS: Thank you very much. It's a real pleasure to be here at the Carnegie Council to introduce to you my book, Mass Flourishing.

Mass Flourishing is about the modern economies, as I call them, that arose in a few nations in the 19th century—Britain and America around 1820, later Germany and France—economies that were well-functioning to the middle of the 20th century. These economies were the marvel of the world. There were not just high wages and wealth; there was rampant prosperity, material and nonmaterial.

One kind of prosperity was classical. The modern economies were achieving growth of productivity and wage rates for a range of standard work, like construction work, and growing pleasure, or decreasing pain, in the workplace. Workers could just ride the tide as their wage rates went up. Non-modern economies, through trade and technological transfers, could tap into that kind of classical prosperity, so many caught up with the modern nations.

The other kind of prosperity was modern. There were gains in one's earning power from expanding one's insights and skills, and gains in one's satisfaction from the experience in the course of one's work. Such gains, the material and the nonmaterial, are rewards resulting from one's own doing. This is succeeding or, as I will call it, prospering. Non-modern nations could not tap into that.

Never before had such prospering been in the reach of large and increasing numbers. Before the first modern economies, economic knowledge, thus productivity, was virtually stagnant, even in the economies that were the jewels of mercantile capitalism, Spain and Holland. The concept of job satisfaction was unknown at that time. For me, the solitary shepherd, bored by the routine and isolated, symbolizes the mercantile capitalism.

The new mass prospering was brought by mass innovating, though the historians spoke only of resources, efficiencies, and increasing returns to scale. In the stream of new methods and products, some found adoption by consumers or producers changing the complexion of the economy. In Britain and America especially, there was a welter of innovations large and small, not just headline innovations. In an 1858 lecture, Abraham Lincoln said of America that there was a perfect rage for the new, a rage that was rife among makers of products, as well as users of products.

Where did the ideas for innovation come from? The German Historical School and the young Austrian Joseph Schumpeter believed that innovations originated from a succession of discoveries by "scientists and engineers," who were generally exogenous to the economy, and the commercial applications of these discoveries by entrepreneurs. The modern economies, however, possessed their own economic dynamism, the desire and capacity and scope to innovate. With their great dynamism, they were capable on a good day of indigenous innovation, not just exogenous innovation.

The system of dynamism was more effective the more open it was to contributors down to the grassroots. The modern economies were rather open to the grassroots. They produced a massive outbreak of tinkering, imagining, and experimenting. Human resources of initiative and imagination were devoted to innovating, not just producing and trading. Dynamism ran high to the middle of the 20th century. No wonder there was mass prosperity. No economy before drew on the imagination of such a wide range of a nation's minds.

This dynamism required entrepreneurs and financiers, of course, just as the sporadic innovations of the mercantile period did. Their judgment and expertise was needed. Yet dynamism further required innovators, innovators with the insight, imaginativeness, and vision to dream up new products that might pan out and win adoption.

Yet the idea that business activity in a free market can always be depended on to possess the dynamism for indigenous innovation is a grave mistake. The right stuff is required. Innovators often have to buck conventional thinking or to break away from traditional ties to family and friends. Innovating also requires a social and political climate that is receptive to innovations, despite the disruptions they are apt to cause.

Was the modern economy desirable? Modern economies yielded a sustained rise of material benefits, including rising productivity and wages, ever healthier products, rising longevity, decreasing poverty and pauperism, and wider inclusion. Factory workers had at least escaped the farm.

The more radical impact of the new economies was nonmaterial. They changed the very nature of life and work where they took root. There were experiential rewards from working on new problems, gathering insights, imagining and creating novel things, testing them in the workplace and trying them out in the marketplace. And there were existential rewards of self-discovery and personal growth from journeying into the unknown. The adventurous and exploratory spirit of the modern economies emerging in the 19th century cities was reflected in the arts of the period. The chapter on this looks at music, fiction, and painting for evidence of this new experience of work and life.

This transformation depended, of course, on the development of institutions that enabled dynamism, including various legal rights, laws governing corporations and financial institutions. The real crux, though, and one not given enough weight until now, is the rise of modern values, the spread of modern attitudes, precepts, and beliefs. These modern values can be grouped under the headings of individualism (thinking for yourself, working for yourself, willingness to break from one's group and from convention), vitalism (relishing challenges and overcoming obstacles, taking initiative, acting on the world), and self-expression (imagining and creating, demonstrating a unique insight by testing it, voyaging into the unknown in hopes of making a mark on the world).

A basic thesis of the book is that the slow accretion of these modern values finally achieved the critical mass necessary to whet the desire in individuals to innovate, to spur the capabilities required to innovate, and to boost the willingness in society to give wide scope for innovation.

Yet a prevalence of modern values may not be sufficient. I'm foreshadowing a little bit here. There may be countervailing values. Opponents of innovation may stifle the expression of modern values.

The book documents the arrivals of modern values over the modern era, in Jacques Barzun's term, roughly from 1490 to 1940. Individualism began with the humanism of the late Renaissance; vitalism, with the exploration in the Baroque era and the experimentalism of the Enlightenment; and self-expression began with the Romantic period. Of course, this cultural heritage belonged to the world, and certainly to all of Western nations. But it is implicit in the book's thesis that some of them did not embrace it strongly enough to incorporate it into their values, the ones they act on day after day.

Ultimately, reactions to the modern economies set in. The fluctuations and disparities in outcomes and even in prospects typical of modern economies and the endemic unemployment led to socialist opposition. Some nations moved part of the way toward a socialist economy, seeing more planning and more state ownership as a step toward stability, equality, and greater employment. Generally speaking, the socialists spoke of greater development of people's capacities to produce, but showed no consideration or awareness of the deeper goals of individuals, the nonmaterial rewards deriving from a life of self-expression, such as exploration and creativity. The socialists failed to provide for innovation.

The rudderlessness and the social upheaval wrought by the modern economies led, in the 1920s and 1930s, to a corporatist reaction, invoking some traditional values found in the Middle Ages and in mercantile capitalism. The corporatist critique in Italy, Germany, and France drew upon a set of traditional values. Corporatists hated new enterprises invading towns and hated new money upsetting traditional ways, wealth, and status. So they hated the lack of society's control over the modern economy. The essence of their thought was a revolt against individualism and self-expression. For them, what mattered was the good of the nation, not the individual, and the government got to decide what is good for the nation.

The classic corporatist economy retained private ownership, but left little control to the owners. It replaced competition and the market with a tripartite system of business confederations, labor unions—both with little power—and the state. Corporatist institutions and policies aimed at social protection, solidarity, and security.

These economies were conspicuous for their patronage and lobbying, not to mention cronyism and nepotism. Some key corporatists—Mussolini, for example—promised higher productivity through innovation without arranging for it.

Corporatists and socialists have continued to claim right up to the present that their systems boost economic performance—on their measures, at any rate. But data from the 1980s and 1990s do not support those claims. In brief, the more socialist economies did not excel at employment. The more corporatist economies did not excel at growth. Such economies have proved so woefully lacking in innovation, indigenous or even endogenous, that they have been unable to realize their own goals.

The book at this point tests its thesis that highly prospering nations require high dynamism, and for that, they have to be high in modern values. To simplify the investigation, the book tests whether highly prospering nations have to be high in modern values. That is done by using the prevalence of several attitudes reported in household surveys—a preference for jobs that are interesting, for jobs that involve initiative, offer change, present challenges—to represent the prevalence of modern values and using the prevalence of reported job satisfaction as a measure of the prevalence of prospering, succeeding.

Among 18 countries in the OECD [Organisation for Economic Co-operation and Development], the six nations where job satisfaction was widespread were all above average in modern values. Generally speaking, the more prevalent modern values are, the more prevalent job satisfaction is. Also the countries where traditional values are more prevalent tend to report a very low job satisfaction.

To return to the book's narrative, in the postwar years, Germany and France enjoyed rapid growth again, and Italy found new growth. But it was mostly through technological transfers. There was mounting evidence of a scant dynamism. In Britain and Germany, later France, the loss of indigenous innovation appears to have been considerable, though concealed by continuing technological transfers from America as long as the supply lasted, which meant, essentially, until the late 1990s.

In America the growth rate of productivity, after subtracting the part attributable to the growth of capital per hour worked—that net growth rate of productivity, sometimes called total factor productivity, fell in the early 1970s to about one-half of what it had been rather consistently in the period 1922 to 1972. It has remained there ever since, with the exception of the years of the Internet build-out, 1996 to 2004.

In all four of the nations, a predictable byproduct of the slowing of innovation has been a swelling of unemployment to higher plateaus.

The book speculates on the origins of the decline of America's dynamism, and thus its innovation. We all know about the extreme short-termism in corporate management and the financial sector. The banking industry has virtually stopped serving the growth of businesses in order to serve governments and home-buyers. There is a widespread impression of enormous self-dealing in large firms, mutual funds, and banks, pathologies that divert companies from innovation to thinking in a short-termist way.

Those who would have liked to try to innovate have to contend with the pull of family and the greater job security and prestige in the professions and in the public sector. Established companies are less interested in innovation than in rent-seeking. After they have got their carve-outs and their special interest legislation, they can keep out upstarts with innovative ideas and ease back on their defensive innovation. So no one innovates—the startups because they can't and the established companies because they don't need to.

The nexus between private and public is confining in several industries, such as education, medical care, and pharmaceuticals. America has strayed pretty far from the pioneer spirit captured by Willa Cather and the movie Shane.

What underlies the shift? The book points to broad evidence of a resurgence of some traditional and anti-modern values since the 1960s and, as a result, the emergence of a new corporatism in America, and earlier in the other once-dynamic nations, Britain, Germany, and France. The book argues that these cultural developments have choked off some of these nations' dynamism, not just caused inefficiency, whether or not modern values have been holding up.

The conclusion all this points to is clear. Modern values, if they are predominant, spark the engine of human imagination that drives the innovation that is central to the modern economy. In contrast, several traditional values operate to inhibit attempts to innovate and block it if it's attempted. Some traditional values, if they prevail over modern values, foster elements of a corporatist economy that impede or even block innovation.

What should the nations with once-dynamic economies do? Serious people have suggested that we say goodbye to growth. The book argues, however, that growth is not the point. It is the nonmaterial rewards, the prospering of the modern economy, that is its distinctive gift to modern societies. But now some prominent economists and commentators propose to say goodbye to dynamism, too, and prospering with it. They are advocating a focus on the quality of life—amenities like sports stadiums, comforts like clean streets, and security. A highly publicized report of the OECD elevates wealth and leisure to top places in the ordering.

My book argues that a good economy is one that offers members of society the prospects of the good life. In substance, the good life is the conception developed across centuries, in the modern era by a succession of philosophers and humanists, a life of exploration, creativity, and discovery. The modern conception derives from Pico della Mirandola, Luther, Montaigne, Cervantes, Shakespeare, Hume, Hegel, Kierkegaard, Nietzsche, William James, and Henri Bergson. Philosophers use the word "flourishing" to characterize this sort of life.

The prospering that came to the economies having dynamism, the modern economies, is a fine specimen, a fine example, of this flourishing. Evidently the modern economies were offering the good life, as it is conceived in the modern era. It would be an injustice not to permit and foster this good life.

Both the left and right, however, overlook the world of creation, of exploring and imagining, and the resulting personal growth. The quality life is no substitute for the good life. The good life is a wild ride through an economy with an open future, an economy offering unimagined rewards, a life of Kierkegaardian mystery, Nietzschean challenge, and Bergsonian becoming. That is what the modern economy had to offer.

Thank you very much.


QUESTION: Edith Everett.

It seems to me that one of the great motivators for innovation stems from greed. Greed is not such a great thing in our society, because those people who don't participate in the innovation are not doing very well. How do you put those things together?

EDMUND PHELPS: Thank you for the question.

Two or three points probably need to be made here. First of all, as Aristotle said, you might not be able to afford the good life without an adequate income and wealth. So a lot of people, especially when they are young, need to make money in order to do something that's maybe more meaningful later on in life.

Now, your question is, isn't greed a great motivator of innovators? I've been to a few conferences on innovation and listened to innovators talk, and they all swear that they do it for the experience and not for the money. But I concede that the money is, to some extent, a motivation.

But the irony is that I think the innovators don't realize that, on the average, the returns to all that investment in time and money are not so good. If you wanted to make money, probably you wouldn't want to live the life of an innovator, unless you were a Steve Jobs with just unusual talent at it. You would probably want to do something that is maybe entrepreneurial, that rewards hustle, hard work, and so forth, or do something with a high level of job satisfaction, so you're socking it away in a periodic and reliable way.

I think I've answered the question.

QUESTIONER: How do the rest of the people who are not innovators—how do they get a value out of this innovation?

EDMUND PHELPS: From the excitement of being in a company that's innovating or working with people on innovative projects, projects that are a little scary, that may cause the company to go belly-up, but, on the other hand, may pay off rather well. It's fun. It's a wild ride, as I called it.

My sense of the 19th century—I wasn't alive at that time—is that it was a time when people got a huge kick out of what they were doing. During my talk, I forgot to—I quoted Abe Lincoln, but I didn't quote Mark Twain, whom I never quoted in the book, because I thought he was such a dark author that I would never find anything that I could use. But it turns out that he wasn't always in a dark mood. He went to Delmonico's one night, on April 8, and he referred to "the drive and push and rush and struggle of the raging, tearing, booming 19th century!"

Sounds good to me.

QUESTION: I'm from Capital Council.

I would just like to continue on the innovation. It strikes me that those innovators whom I have known, both in science and in business, are people indeed who are keen on understanding how things work and making changes in how things work. I would submit that the benefit to society is the enormous discovery that results from innovation, such as the discovery of DNA by Watson and Crick. It has been enormous and it has not even been fully plumbed yet.

What I'm surprised at is that, when we're talking about innovators, there's so little excitement about them. When I was young, we all read about Thomas Edison because he was a great inventor and transformed the world in which I grew up.

EDMUND PHELPS: Many people, I suppose, are into consumption more than I am. I'm more into job satisfaction, the work experience. I always have been, throughout my career. My first paper on wages and unemployment was centered on what the company needs to do to stop the workers from going off towards something they might find more interesting.

A lot of us feel, I think, that the high-productivity nations have already reached such a high level of gross domestic product and income, after a streak of slightly more than 200 years—just about exactly 200 years—that it strikes us as strange that one would think that there would be big payoffs from higher GDP.

As I'm sure you know, there has been a different set of investigators that have gone into the household survey data and explored whether there is a link between reported human happiness and GDP per capita. Well, the initial findings were probably overstated, and they caused quite a stir. The initial findings suggested that once a country is at something like $20,000 or $30,000 per capita, that's it; no more human happiness results from higher levels that some countries have.

Now that that has been worked through more carefully, now we can say that a somewhat higher GDP is indeed appreciated. But it's not a big determinant of reported life satisfaction.

Those are the data. I think we have to remember that people differ a lot. Some people are really into particular advances. They get a kick out of that. I don't deny that. I'm saying that people like novelty, like exploration. But that point about getting a kick out of new things—that's on my side. That's the novelty, the newness, the thrill of the new stuff. That's what was making people excited and that's what gratified them. It wasn't that they made their lives more—in my approach, in my view, those advances were valuable because they were fun, because it was exciting, and not because of the increase in income that it represented.

QUESTION: Ron Berenbeim.

I would like to defend the proposition, actually, that greed and innovation are somewhat twinned today, for the precise reason that most of the innovation, at least that I'm aware of, has been in the field of finance. If Thomas Jefferson were alive today, he might very well be a hedge fund manager. If he became enormously rich, he might live in a $110,000 house in Omaha, Nebraska, because he would have no interest in spending it in any particular way.

The problem, as I see it from your talk, is not that there is a lack of innovation, but there is an absence of the values that you described as being the catalyst for innovation. The catalyst for innovation now is just to make more money.

EDMUND PHELPS: There are lots of people with very high incomes these days, so it looks like we have plenty of catalysts. That catalyst is firing on all eight cylinders.

I don't really know what to say about that. I think there have been a whole bunch of cultural changes, a resurgence of traditional values, that have tended to inhibit, not everybody, but a lot of people from innovating. But especially, I think that this resurgence of traditional values has sort of taken us back to the corporatism of old, even back to Medieval thinking in extreme cases.

It's a very rocky road now for the would-be innovator. It's a mistake of would-be innovators, as I said, to imagine that, on average, they are going to get rich. On average, they are going to not do much at all. It's only the fortunate ones who will do very well.

So I don't see how the pecuniary prospects here—maybe the pecuniary prospects have gotten a little better. That's your position. I think the pecuniary prospects have gotten worse, because I think there's now more power in the hands of established corporations, so it's tougher for outsiders to get ahead.

It's very tough down there in the grassroots. There are a lot of people down there in the grassroots. That's where the majority of us live.

Yes, the occasional genius out of Harvard or Stanford—the Zuckerbergs and the Jobses—they seem to have a knack for it. But even Zuckerberg—I don't know whether it was the money. The famous venture capitalist Peter Thiel said—I don't know if it was publicly; it was said to me, and I think he has told hundreds of people, thousands of people since then—that the reason he decided to bankroll Zuckerberg was that he liked the fact that Zuckerberg only awarded himself a stingy salary of something like $60,000 a year, or even less, while typically he was encountering startup entrepreneurs who were paying themselves a whole lot of money. Thiel thought that the abstemiousness of Zuckerberg spoke well for him and that he was the sort of guy who was devoted, not just trying to see how much money he could make.

QUESTION: Adam Smith did not use the term "greed." He used the term "self-interest." Self-interest can reflect nonmaterial as well as material rewards.

Secondly, most billionaires don't think they are going to eat two breakfasts when they make their second billion. Children play the game Monopoly because they want to win. Most billionaires, like a Donald Trump type, want to keep—in the real world, there's a Broadway and a Park Place that you try to get through leverage. People want to win.

Finally, a point to be emphasized is that mass flourishing benefits everyone. The entire society develops, with greater material and immaterial benefits.

EDMUND PHELPS: Absolutely. I never meant to suggest that there were not material rewards in the 19th century. There were tremendous material rewards in the 19th century. And, as Aristotle said, when you're young, you need a lot of money. You need a lot of money in order to succeed later in life. So you go for the money when you're young. Later on you diversify. You may still be making a lot of money, but you're doing other things, too.

QUESTION: George Paik.

I'm with a boutique investment management firm downtown, just by way of background. I have a two-part question. I'll give you a short prefatory comment to set up part one, which comes out of reaction to what we have just been hearing here.

My impression of a lot of financial innovation of the last 20-odd years is that it may be innovative in manipulating mathematics and rationales, but I view it as a lot of attempts at rent-seeking, which you alluded to. I don't know how that squares with your perception, but—

EDMUND PHELPS: A tremendous amount of rent-seeking going on.


EDMUND PHELPS: I wouldn't identify rent-seeking with innovating.

QUESTIONER: I guess my comment is, I take a lot of what is called innovation to have been that in the last 20 years, particularly in the financial sector.

EDMUND PHELPS: I think banks can do two things at the same time.

Incidentally, the Italians were already doing structured finance before it was noticed on Wall Street.

QUESTIONER: They were.

EDMUND PHELPS: So Wall Street was not really the great innovator here. The Italians in Milan were.

By the way, of course, the French mathematician Bachelier did the basic work in understanding the pricing of puts and calls and all sorts of contracts.

Yes, the banks did an innovative thing there. Unfortunately, it had very bad consequences. Had it been better regulated, were that possible, it might have had good consequences. But in any case, it didn't have good consequences. Yes, it made a lot of people rich. There we are.

Is this destructive, in some way, for my thesis? I don't understand where you're going.

QUESTIONER: I'm sorry, it was a little bit of a prefatory comment.

The modern values which lead to innovation—it strikes me that they start with a lack of prior definition, lack of prior constraint, if you will. Is there some article of faith in human nature that is basically embedded in these modern values? Is that not a leap of faith for human nature? How does that play into the rest of it, in your mind, in your thesis?

EDMUND PHELPS: Well, Kierkegaard thought that human beings were able to make a leap of faith. Often he was writing in the context of religious belief. But Kierkegaard scholars—of whom I'm not one — think that he was also recommending a life of journeying into the unknown. He was saying that the anxiety that that induces, that that causes, is something that should be borne for the sake of the deep rewards of such explorations. Kierkegaard, then, seems to have supposed that it was very much part of human nature to relish such explorations.

But my thesis, I suppose, says that people needed a little encouragement. You needed people not to think you were crazy if you went off on a voyage of discovery. So these urges that we have as human beings needed a little bit of cultivating. It helped to have a culture that commended explorations, that advised people to tough it out and brave the uncertainty for the sake of the rewards.

QUESTION: David Musher.

I'm very sympathetic to your thesis. I'm glad you made it. I am concerned about the direction that this country has gone in the past numerous decades. My question is, is it inevitable that this will be unidirectional?

EDMUND PHELPS: Like going from bad to worse?


EDMUND PHELPS: I certainly didn't suggest that in my talk, and I don't breathe a word of that in the book. It didn't really occur to me to think that that was the future direction.

In my thinking, to the extent that I thought about that—one crisis at a time—but to the extent that I thought about that, I would have said it was about as likely that things got worse as it is that things would get a little better. We can't foretell the future at all well, so I think we would be foolish to take bets on that.

I do think, and I fondly hope, that if we have a national conversation about the kind of working lives that we want to have, which I suppose will lead to a national conversation about what we see the role of the government to be, that will improve the chances that we'll pick up and move to a higher plateau, though I think it would take quite some doing to get back to the rate of innovation of the 1930s or the 1880s. They were burning the rubber off the tires at that time. I don't think that's going to be easy to recover to.

QUESTION: James Starkman.

Very interesting subject. Thank you for quite a talk.

Fortune magazine publishes two issues, one the 500 largest corporations, the other the 400 most admired corporations. Corporate culture, it seems to me, has much to do with the contentment and rate of innovation of employees. If one looks at the Google campus, for example, which is well known, there are a lot of very happy innovators running around there. And I don't think they are alone. I think the biotech industry also would have many examples of that.

EDMUND PHELPS: Would you say that the compensation has something to do with that, the rate of pay has something to do with that?

QUESTIONER: No, no. What I'm saying is that —

EDMUND PHELPS: Oh, just the work.

QUESTIONER: Yes, the joy of the work. And they are not mutually exclusive, that satisfaction and joy in the work is in some cases compensated at extreme levels. That's not a mutually exclusive phenomenon.

EDMUND PHELPS: Yes, right. That's absolutely right.

At Google, it isn't unpleasant work for which they need to be compensated handsomely. The reason they have high wages is because Google is trying to keep them at Google rather than go somewhere else. That's what that's all about. You pay a high wage so they won't quit on you, incentive wages. That's exactly right.

As I was forming my ideas, probably in the very early 2000s—at the latest, around 1999, 2000—I remember a photograph of a bunch of employees spilling out onto the lawn, all looking jubilant. Now, that photo is not entirely on my side, because they had just had a successful IPO, so they had just all become very rich in the space of a few minutes. But the photograph, I think, also speaks of a delight in being at the company and their camaraderie and their whole happiness with their lives and their jobs. It all was released at that point, and they thought, "Gosh, how lucky it is to be me, and how lucky to be us working together in this exciting project."

QUESTION: Susan Gitelson.

What do you say about what may be the greatest economic challenge today, and that is the increasing separation between the wealthiest 1 percent or whatever and the middle classes, who would love to enjoy life more and be compensated and provide for their families and have health care and so on?

EDMUND PHELPS: First of all, there has always been an inequality. Of course, there's just inequality and unjust inequality. As I said in my talk, I think that it would be terribly unjust to have an economy that didn't offer people the opportunities to live the good life, period.

But I'm glad to speak to the rise of inequality. I certainly think this recent rise in inequality is not something that could be justified as actually helping people at the bottom, because I think there's no doubt that the gains at the top, in this case, subtracted from the gains of people at the bottom, and came partly at the expense—not totally, but partly at the expense—of people at the bottom and in the middle.

I think economists are a long way from getting to the bottom of that. But some of my arguments do have implications with regard to inequality. One of my arguments, you may recall, is that the established corporations—and there's a whole bunch of them in the heartland of the country, as you know—have got themselves pretty well protected, thanks to their lobbyists and their lawyers and all that. So not only have they stopped doing defensive innovation, which, for me, is serious, but also, from this impregnable position, from their new impregnable situation, they are in a position to raise markups, so they can raise prices. Of course, then that also makes it possible to raise wages of CEOs and other top management people. So you just get this tremendous rise in inequality.

As I said, that's an increase in inequality that is not springing from something underlying that's actually good for the working poor. There's nothing like that visible here. On the contrary, this is a rise in inequality that comes from some forces that were already having bad effects on innovation, and on top of that, they have bad effects on inequality.

QUESTION: Matthew Olson.

I'd like to think I was paying close attention to your prepared remarks, but I don't recall an awful lot of discussion about government regulation. The closest thing I remember your talking about something that would touch on that subject is that you mentioned in answer to a question a few minutes ago about the 1880s being a period of very productive innovation and the 1930s being a period of productive innovation. For two eras, when it comes to government regulations, it's kind of hard to imagine two things farther apart.

Does government regulation mean anything to your thesis?

EDMUND PHELPS: Unless I accidentally hit the delete key, there is a sentence in my prepared remarks that says that established corporations use their influence through lobbies and so forth to gain favors, gain protections from competition, and so forth.

Possibly you were looking for me to say some conventional things about the costs of regulation. I'd be happy to say those conventional things, but I was interested in a particular avenue and a particular perspective. I was single-mindedly focusing on things that I thought seriously reduce innovation. There are a number of very bad things that don't necessarily reduce innovation, of course.

Yes, I think not only is regulation bad for efficiency—and Jean-Baptiste Say was very good on that in 1805 or something like that. Mancur Olson was even better on that in the 1980s. But I'm not doing that. I'm talking about the effects of some regulations that, in protecting vested interests, make it harder for outsiders to start up enterprises that would challenge them. Therefore, you get—it's a double hit. You don't get as much innovation from the startups and you get less defensive innovation from the established companies. And that's bad.

JOANNE MYERS: I thank you so much for sharing your ideas with us.

EDMUND PHELPS: Thank you very much.

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