Edmund Phelps on Mass Flourishing
Nov 11 2013

Edmund Phelps of Columbia University, Nobel Laureate in economics, and author of Mass Flourishing talks with EconTalk host Russ Roberts about the ideas in the book. Phelps argues that human flourishing requires challenges, struggles, and success and goes beyond material prosperity. He argues that in recent decades, policy has discouraged innovation and mass flourishing resulting in a slow-down in growth rates. Phelps emphasizes the non-material benefits of economic growth and the importance of small innovations over big inventions as key to that growth.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Nov 11 2013 at 9:10am

Phelps said,

I would think that most industries could have gotten along in the 19th century pretty well without steam. [ … ] In the entertainment business, do they need steam in order to increase box office receipts with their new developments? No. Their advances were not based on steam. Clothes. Example: Cotton took the place of wool–it was quite important. Disease rates fell as a result of that. And again, what does that have to do with steam and the steam age?

1. Steam generated the electricity that lit the theaters.
2. Steam ran the cotton gins.
3. Steam threshed the grain.
4. Steam powered the tractors.
5. Steam pumped the water out of the coal mines and powered the ventilation systems.
6. Steam pulled the trains that moved people and goods.
7. Steam powered the ships that imported and exported people and goods.
8. Steam milled the lumber and powered the furniture and shipbuilding industries.
9. Steam powered the heavy equipment that dug foundations, drove pilings and lifted material used to build our cities.
10. Steam powered the quarries that supplied the stone used in our cities.
11. Steam powered the metalworking equipment that manufactured the consumer goods and machinery that made up much of the economy.
12. Steam powered the rigs that drilled for oil.
13. Steam powered the equipment that mined iron ore.

I think that Phelps is wrong in his assertion.

Nov 11 2013 at 10:49am

I do not know what to make of this topic. What really worries the employees is how long will their jobs exist. That is beyond their control and is a great source of anxiety that disrupts their rewarding lives. That aside, in the company I work for, many of the lower level employees may not find their jobs as rewarding as they would like but they do make up for that by becoming more involved in their communities as Ministers, activists, high school coaches, director of a charity, etc. It is a flaw of the company that these valuable skills are not recognized and applied inside the company.

Isn’t rent seeking is larger today than the past simply because the government is so much larger today than in the past? Competitive advantage means not only innovating and improving product but blocking any new competitors. It also means taking advantage of rent seeking. The Board of Directors would probably think a CEO as incompetent if he did not do these things. Theodore Vail encountered exactly this with the ATT Board when he set up Bell Labs, one of the most accomplished corporate R&D operations ever. Bell Labs purpose was to innovate thus rendering current phone systems obsolete. The Board though he was nuts.

God Bless our Vets.

Nathan Beckmann
Nov 11 2013 at 2:22pm

Adding to what Speed said, the significance of steam and coal in the industrial revolution was the expansion of the energy budget for human industry. Prior to the steam engine, industry was limited in total energy by the amount that humans could capture annually from the sun — very inefficiently, mostly through plants and limited hydro power. The most powerful machines were oxen. After the steam engine, vast reserves of energy that were locked up in coal became available for industry, leading to automation, railroads, etc.. The energy budget of these activities is basic physics and would not have been possible running on sustainable sources with pre-industrial technology.

This trend has continued into modern times. Comparing productivity today with productivity before the industrial revolution, modern industry is less efficient. For example in agriculture, we put far more energy into our fields than the proportional gain in yields. A single Google search consumes as much energy as boiling a pot of water. Our ever-increasing energy capture is what allows productivity growth to continue.

It’s also true that the break up of royal grant of monopoly and the resulting liberalization of the economy was a necessary condition for all these developments to come about. But one can’t ignore the impact of steam (or coal, more precisely) in allowing for the explosive productivity growth that followed.

Cowboy Prof
Nov 11 2013 at 3:44pm

To respond to Speed,

Yeah, but other than all that stuff, what has steam done for us lately?

(Also, Speed forgot to mention the all important steam sauna industry.)

Nov 11 2013 at 4:00pm

I very much like Phelps’ non-idealistic contrast of the lone shepherd’s monotonous life with that of the engaged and stimulated urbanite. He also thoughtfully notes that Dickens himself was captivated by the hurly burly of London, and I would put Blake into the same conflicted position, notwithstanding his dark, satanic mills. The central point is to ask “compared to what?” and then to recognize the tradeoffs inherent in all enterprises, including the tumultuous era of the early Industrial Revolution. While somewhat elliptical from time to time, I thought Phelps raised some excellent points in this regard.

By the way, many people believe that the last movement of Beethoven’s 2nd Symphony is a musical interpretation of his own gastric difficulties at the time! Whether that is true or not, there is much to support a musical, artistic and intellectual appreciation of trial-and-error methods during the era, and I think Phelps is correct to note it.

Nov 11 2013 at 5:54pm

Cowboy Prof asked, ” … what has steam done for us lately?”

Aside from nuclear power plants and petroleum refineries? It appears that steam is losing some ground to gas turbines and combined cycle power plants for generating electricity but still has about 80% of the market.

Steam has had a good run.

Nov 11 2013 at 5:58pm

From what I see, innovation happens in the initial chaos of new industries. Once the fruits of innovation start to bear fruit and create wealth, the emphasis becomes more about holding on to what you have. Once that mindset takes hold, innovation becomes a trickle where there once was a river. You can’t simultaneously protect what you have and take risks at the same time.

Nov 11 2013 at 5:59pm

Nathan Beckmann wrote, “The energy budget of these activities is basic physics and would not have been possible running on sustainable sources with pre-industrial technology.”

And is still not possible running on sustainable sources with today’s technology.

Nov 11 2013 at 8:11pm

Good talk but this guy needed a cup of coffee or something.

In regards to his comments about no innovation in the heartland I believe there’s been a lot of innovation there and one could argue the innovation there has had a better impact on our daily lives compared to Silicon Valley’s. Shale fracking has reduce energy cost and may give America energy independence, while various agricultural improvements have increased the amount of crops we can grow per acre and reduce the amount of hands needed to cultivate crops.

I wish Russ and Edumund could have discussed one of the impacts on the one of the form of innovation that has been flourishing in our country. It seems that most innovation is reducing the work force by making more with less. Previously innovations lead to more jobs being created but now disruptive innovation are leading to a reduction in the work force.

Jim Feehely
Nov 11 2013 at 10:21pm

Hi Russ,

Can I suggest that the decline in innovation parallels the growth in the size of corporations and organisation generally. Big corporations engage publicly in the rhetoric of innovation, but their actual practise is about being just like their competitors out of a fear of doing something wrong.

The dominant focus of boards is ‘risk management’ not performance. Risk management is the direct enemy of innovation. Structured procedural ‘accountability’ is the direct enemy of performance and innovation.

Similarly, employment is much more about obedience than it is about performance. That is achieved by accountability that is never matched by commensurate authority. Luck (almost always mistaken for ‘success’) is rewarded, not quality effort.

And all these phenomena become more virulent the bigger a corporation or organisation becomes. If you want something done the dumbest way, get the biggest organisation to do it.

Disaggregation and supporting floor for failure is the way to increase innovation.

And we need innovation more than ever before – innovation to solve pollution, species and biodiversity destruction etc. These crucial social objectives can longer be the accidental by-product of the pursuit of profit. They must become the principle way to make profit. Only in that way can the objectives of capitalism become aligned with the authentic objectives of society – the good life.

Jim Feehely.

Todd K
Nov 12 2013 at 2:45am

This really jumped out:

Phelps: Well, there really wasn’t much scientific discovery going on in the 19th century. There weren’t very many scientists in the world, for one thing. I don’t see how we could possibly attribute 2% growth of productivity year after year in Britain and America after centuries of 0.0-something, how we could possibly attribute that to a flow of scientific discoveries between 1815 and 1940 or 1960.

There was a reason Einstein kept photos of Faraday and Maxwell on his desk. This just scratches the surface, but here are the top 20 physicists of the 19th century, with many more in the early 20th century: http://en.wikipedia.org/wiki/Physicists

In addition, productivity did not jump from 0.0% to 2% “year after year.” The estimate for the 1600s was 0.1% in Western Europe, followed by 0.2% to 0.5% in Britain by the mid 1700s. And productivity in the first half of the 1800s was around 0.5% to 1.5%. So at least a 150 year process to leave ‘0.0 something’ and reach consistent 2% productivity growth in good economic times.

Ben Hughes
Nov 12 2013 at 6:15am

I thought this conversation had potential, but to be honest I was left fairly disappointed.

The idea that innovation is bottom-up and the science often comes in after to formalize and explain, rather than to kick things off, is solid. Taleb does a good job of exploring this in Antifragile.

The idea of “modern values” driving innovation is reminiscent of McCloskey’s Bourgeois Dignity, but as presented here it was not so convincing.

I thought the job satisfaction discussion missed the obvious: that while many people aren’t literally turning a bolt, many office jobs are just as mind-numbing. The difference is that we often convince ourselves of the vital importance of our bolt-turning.

Towards the end, Phelps seemed to slip into a “kids these days” frame of mind. I found the idea that friends, family and greed were somehow distracting us from the saintly pursuit of innovation just bizarre.

Most frustrating though was the entirely circular nature of Phelps’ argument. Unable to measure innovation, he came up with the proxy measure of modern values. Now that he sees (seemingly anecdotally) these values declining, he concludes innovation must also be declining. It’s possible, as Russ mentioned, that wealth has changed our incentives: we may not have the same drive and ambition because we are no longer subsistence farmers. But looking around, I find it hard to be convinced that we’re flatlining; or, that if we are, it’s such a horrible place to slow down. The issue (a la Cowen) is more about how society shifts from a high growth/full employment arrangement to something new.

Nov 12 2013 at 7:58am

A.Grant wrote, “Previously innovations lead to more jobs being created but now disruptive innovation are leading to a reduction in the work force.”

That is an argument of the type, “This time it’s different.” It seldom is.

Jim Feehely wrote, “Disaggregation and supporting floor for failure is the way to increase innovation.”

The GM and Chrysler bailouts, for example. The counterexample is Ford which risked everything — they mortgaged all their assets and spent on innovation and new products.

Jim Feehely also wrote, “These crucial social objectives can longer be the accidental by-product of the pursuit of profit. They must become the principle way to make profit. Only in that way can the objectives of capitalism become aligned with the authentic objectives of society – the good life.”

The most effective way to integrate “social objectives” with the pursuit of profit is for customers to demand that companies operate in ways that achieve “social objectives” — what ever they are. Achieving these objectives through regulation is, in many cases, a form of Rent Seeking and/or Regulatory Capture by special interest groups.

With respect to “mind numbing jobs,” the millionaire businessman (farmer) driving a $300,000 tractor to plant his soybeans or an even more expensive combine during harvest is doing one of the most mind numbing jobs on the planet. His choice as are most others. One of the objectives of technology is to eliminate mind numbing jobs and there are far fewer farmers today than there were a century ago.

Russ Wood
Nov 12 2013 at 11:20am

Prof. Phelps said, “There’s a familiar story out there; I didn’t invent it, the Austrians did; and Wicksell in Sweden and so forth. The idea is that to a rough approximation we can think of consumer goods as being produced mainly with capital. And capital goods are produced mainly with labor. Now, if the innovation is in the consumer goods sector, then that’s driving the price of consumer goods down relative to money wages. So real wages are rising and that pulls up employment. And that’s great. But once you start having innovation in the production of the capital goods, then you’ve got two things going on. One, labor is physically more productive in making capital goods. But the capital goods that labor makes are now going to be cheaper, in terms of consumer goods. So that’s a bummer. And that lowers real wages, and thus leads on to a reduction of labor force participation and employment.”

I’d be interested to hear more about that Austrian/Swedish theory of capital-consumer goods, labor-capital goods. Perhaps you could have a guest discuss that, or put up some links?

Nathan Beckmann
Nov 12 2013 at 12:30pm

Ben Hughes said: “The idea that innovation is bottom-up and the science often comes in after to formalize and explain, rather than to kick things off, is solid. Taleb does a good job of exploring this in Antifragile.”

And this is one of the reasons why I stopped reading Antifragile. Taleb used the internet as an example — except, guess what? ARPAnet was a project funded by the government, conceived and implemented by Computer Science professors between different universities. It’s a perfect counterexample to his argument, but he trots it out as though it proved government-directed research is ineffective.

The fact is, however inconvenient this is for a particular view of government or academia, innovation can happen anywhere, and science and engineering — “tinkering” according to Taleb — both play an essential role. Many of the best innovations occur at the interface, when science discovers something new and exciting, but scientists don’t really know what to do with it. This is what the Internet is a good example of, but there are countless others.

Denigrating the role of science in order to sell a bottom-up story is as oversimplified and naive as saying that we owe all innovation to science. Let’s stop selling narratives and start considering the evidence impartially.

Mark W
Nov 12 2013 at 4:57pm

If by listening to this podcast while I walked my dog at the park did I multiply my “passive activity” and render added value?

Phelps seems to be unaware of the many un-paid activities that give people a sense of well-being. Wikipedia, Linux and blogs are highly popular examples of unpaid work.

I heard Russ’s final question regarding lessons learned as a callback to his previous comments that many economists have not learned from the economic crisis. Phelps revealed quite a bit in his weak response.

John Michael Zorko
Nov 14 2013 at 2:33am

Most Econtalk episodes are fascinating, for even if I initially disagree with either Russ or his guest, my eyes are opened to equally valid counters to my views.

This episode, though, was the rare exception. While I was at first sympathetic to Mr. Phelps points, his increasing pessimism, as well as his thoughts that large swaths of the US simply aren’t very innovative and are too “passive” wrt their lives, not to mention his rather off-putting perspectives regarding activities involving computers, left me actually glad when this episode was over, vs. the much more common desire that it keep going for another hour or so.

Kevin Smith
Nov 18 2013 at 7:55am

As someone else said, the idea that there is no innovation other than Silicon Valley seems to directly contradict the idea that business innovations are progress which the podcast spent some discussion on. Not on the coasts we have oil and gas and the shipping and warehousing success of Walmart to name the first 2 counter examples that came into my head.

As others said, I found just plain weird the guests degradation of things like, “staying home to help the family.” Much of this discussion reminded me of this Onion article:


Our lives do not exist to be thrown on the alter of progress and innovation and though Dr Phelps may not be able to handle a less exciting life, many people are happy to opt out of the rat race and innovate in ways that do not show up in GDP. I am sure this is a complete sidenote in the book but he came back to these odd points repeatedly.

Greg McIsaac
Nov 26 2013 at 12:02am

The November 25, 2013 episode with Joel Mokyr was a nice counterpoint to this episode.

Regarding the slowdown of growth rate, I was hoping for some mention of the simple fact that growth rates are a function of the starting point. When per capita income is $1000 per year, an increase of $50 per year is 5% growth. When per capita income is $30,000 per year, annual growth of $300 per year is 1%. To some extent lower rates of growth are the the result of accumulated wealth and simple arithmetic.

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Podcast Episode Highlights
0:33Intro. [Recording date: October 22, 2013.] Russ: Let's start with what you mean by flourishing. Guest: Good question. Roughly speaking I mean prosperity. But of course prosperity is a word we throw around without any precise definition. I do mean prosperity, but in particular there is a part of it that is a key concept. You might call it 'prospering.' We wouldn't say that somebody is prospering just because he has a high wage. Now, we might say that somebody with a rising wage is prospering. But I'm particularly interested in the case where the rising wage is a result of the individual's efforts, his investment in himself, the experience he's gained, the insights he's gained--that kind of thing. I'm not interested in the wage gains that come from what's going on in the global economy, which is causing the guy's wage to rise through no effort on his own. You follow me? Russ: Yes. But you also mean something much richer in the book than just material wellbeing. Guest: Absolutely. So, that's the material side. Now, on the non-material side I mean having fun, not every day, but lots of times, in the process of doing the work, in the process of exploring and experimenting and discovering and all that. So there's the material prospering that is all about the money that comes from experimenting and exploring and so forth, and then there's the internal satisfactions that come from it all. That's the nonmaterial side. Russ: So this is a new phenomenon in human history, going back maybe 200 years for some people, but as a mass phenomenon, at least a common phenomenon it's only maybe in the last century at best. And you and I, I think, are flourishing. We have rich lives way beyond the material. We are comfortable materially, but that's not what makes our lives so pleasant, I don't think. It's part of it, but it's not the main reason. The fact that I get to sit at this microphone in the comfort of my house outside of Washington, D.C., call you in New York, have a fascinating conversation and share it with people who enjoy it--most of them--that's extraordinary. So, my question is, and it clearly gives the texture of life a very different feeling than if you and I were in a factory all day long turning a bolt a la Charlie Chaplin's Modern Times, which you allude to in the book. So, my question is: What portion of the American workforce has such a life, this life of challenge and change and interesting new things that come along, at one extreme, versus the bolt, turning the bolt, at the other extreme? Do you have any feel for that? Guest: Well, sure. I have an impression about it. What I argue in the book is that the first modern economies, Britain and America around the 1820s were just full of people tinkering and experimenting and exploring and sometimes discovering new ways to produce or an improved product to produce. I don't know much about John Deere who invented an important plow but I'm sure he was a guy who was fooling around with different ways of designing the plow, and through experience and testing and so forth he hit upon a superior design. That was the plow that broke the Plains, that created American agricultural. So, I think that flourishing was widespread in America. It was certainly, I'm sure it was present in agricultural and in small manufacturing. And I think also in companies it was present top to bottom, right down to the grass roots, I think. Now maybe that's more difficult, more rare now with all this high tech stuff. Russ: Well, it's hard to know. I think people who work on a Chinese assembly line producing iPods probably have a relatively unexciting life. But their standard of living is being transformed; and that's wonderful. I'm just thinking about the average American. It's hard to know. Guest: Yeah. So, my feeling is that while there is still mass flourishing out there--meaning a whole bunch of people out there are flourishing, just like mass unemployment means a whole bunch of people are unemployed--it doesn't mean they are all unemployed. So I think we certainly do have this mass flourishing out there. But I think it's not as widespread, not as mass, so to speak, as it was. Russ: Yeah. You feel we've lost something. Guest: Now maybe some part of it is because it's gotten so technical that people at the bottom of the organization part can't contribute. But I think it's mainly because of a narrowing of innovation. I think that there are whole industries now that are not nearly as innovative as they were. And I think that most of the innovating that we see is that brilliant stuff going on out in Silicon Valley. And really up and down the West Coast, a fairly thin sliver of land along the West Coast. And they are kind of carrying us. But there's not much innovating going on in the heartland. I don't know what you think. Russ: Yeah, I don't know if that's true. I do think there's a lot of innovation going on on the West Coast. When I'm out there, and I usually spend a chunk of the summer out there, I find it's invigorating. It's in the air. You can literally feel it, it seems anyway. Guest: Yeah, right. Russ: But when I think about your concept of flourishing, I think about the person sitting in Wichita, Kansas or Peoria, Illinois, or St. Louis, Missouri, or Columbus, Ohio, who is doing something innovative and exciting using modern technology. It might be improving a process, it might be creating a web page for the company they work in; it might be a thousand things. It's not the glamorous stuff that we think about. Guest: I agree completely. We've got to stop thinking about innovation as being just headline innovations or worse yet, just breakthroughs that come along every decade or two. We've got to start thinking about innovation as something that goes on continually. Surely a little bit of it must go on in operating rooms in hospitals. It must be that people notice different ways, better ways, of doing something. And some of the more important discoveries immediately get taken up by other hospitals. There's a whole world of change going on that we don't directly see. Russ: It's a very Hayekian process, as you mention in the book. It's the particular knowledge of time and place, the insights that only the people who are touching and deeply involved in a process often can generate. Guest: Right.
10:40Russ: So, this transformation of material standard of living and productivity in the 19th and 20th centuries: you attribute that--you dispute the standard explanations of that transformation--scientific discovery, the headline inventions of some of the major things we think about those times. And you want to really push this grassroots innovation. Explain why you reject the standard explanations and why you prefer your approach. Guest: Well, there really wasn't much scientific discovery going on in the 19th century. There weren't very many scientists in the world, for one thing. I don't see how we could possibly attribute 2% growth of productivity year after year in Britain and America after centuries of 0.0-something, how we could possibly attribute that to a flow of scientific discoveries between 1815 and 1940 or 1960. But especially in the 19th century, it just seems clear as day that businesses, people in companies, are creating new products and creating new ways of producing existing products or improving existing products. And they are doing it without having to reach for some scientific textbook. As a matter of fact, the economy historian, Joel Mokyr, says somewhere that scientists were challenged by what businesses were doing and they had to pull up their socks and try to understand how it worked, how some of those methods worked. Because there had not been a scientific understanding that automatically led to that. Russ: What about the inventions you mentioned--the spinning frame, the steam engine, wrought iron, the locomotive? These are important but you don't think they were decisive. Guest: I just think that the more conspicuous ones, the more obvious ones, maybe the ones that it's easiest to tell stories about, the most colorful--Robert Fogel became famous or notorious for arguing that the railroads didn't contribute anything to GDP (Gross Domestic Product) that wouldn't have been contributed by growth of the canals and so forth. I would think that most industries could have gotten along in the 19th century pretty well without steam. And of course we shouldn't be forgetting the so-called creative industries. A term I don't like very much since for all this creativity going on in all industries, one hopes that some creativity is being exercised in all industries. In the entertainment business, do they need steam in order to increase box office receipts with their new developments? No. Their advances were not based on steam. Clothes. Example: Cotton took the place of wool--it was quite important. Disease rates fell as a result of that. And again, what does that have to do with steam and the steam age?
15:23Russ: So, many people argue that that transformation of the 19th century was a very unpleasant one for the workers who lived through it. You disputed that a little bit. You talk about the literature of the day--Les Miserables, Dickens's Oliver Twist, and other books of Dickens', that they paint a pretty negative picture of daily life. But you think it's a little cheerier than that. Guest: Well, first of all, I don't think that Dickens was a particularly dark writer. If anything I would say that Mark Twain is a particularly dark writer. Dickens loved the energy of London. He used to take what were called 'midnight walks'--night walks through the city. He was a restless person, sometimes couldn't sleep. And he loved the energy of the city. And he saw businesses as salvation of people, giving them things to work on, giving them activities to get involved in. It's absolutely--Dickens was excited by the times in which he was living. He did think that bosses should be more kind and think a little more about the way they are behaving. Sure, that's true. But you can't say that Dickens was a sort of a documentarian of misery in the 19th century. That's just not on. That's not correct. Russ: It was probably hard to be an orphan in the 19th century, but that's probably true lots of times. Guest: Yeah. Russ: Maybe Oliver Twist is-- Guest: Let me make this point, which is certainly made in the book but it can't be made strongly enough. For me what symbolizes the mercantile capitalism of the 18th, 17th, and 16th centuries is the lone shepherd cutoff from society, bored to death because nothing is happening. And he has nobody to talk to, no way of having interchange with people. He can't exchange thoughts, ideas. That is really terrible. And by contrast, cities offered people fabulous opportunities for interchange, for developing their minds. I think Britain went from one city to five cities in short order, and on probably what is another definition, Germany went from one city in the 19th century to 100 cities, according to one estimate, at the end of the century. So, the intellectual life, and the stimulus of what's going on was so much richer in the 19th century than it had ever been before. Now that's just tough to prove in a way that does satisfy an econometrician. But I argue in the chapter in the book that you can kind of feel some of this in the music of the time. I suggest that the last movement of Beethoven's symphony is about trial and error; he marches in one avenue, then he beats a retreat; then he tries another avenue, beats a retreat. I was saying this at a little conference in London and some guy was shaking his head up and down in agreement with me. He happened to know the symphony. There's a lot of innovativeness. Work had suddenly become interesting for the first time for significant numbers of people. Russ: I'm sure that guy nodding was not an econometrician. Or probably not. I take your point, and I think it's a fabulous example, the lone shepherd versus the person living in the city. If you want some evidence, what I would look to is what's going on in China today. People don't want to be that lone shepherd any more. They want to be in the city. They want to be doing that job that we look us, many of us in America, as a dreary job, working on that assembly line. And it beats up at night [?] but night you have people to talk to, and it beats staring off into the distance for 18 hours looking for lost sheep. We romanticize the lone shepherd; it's interesting--we think of him as this heroic figure, in touch with the land and his sheep, but in fact most of us don't want to go there. Guest: No, no, absolutely not. By the way, you might be interested to know whether there was something in my personal life that led me to that, indirectly. There is. My mother grew up on a farm. Successful farm in southern Illinois. And she would shudder at the thought of going back to that farm. She beat a path to Chicago as soon as she got out of college and never looked back, while her 7 brothers and sisters, some of them did stay on the farm. Russ: I spent a summer on a kibbutz in Israel picking peaches, and let me tell you--it's not exciting work. Now, there are probably people who get satisfaction from it. I don't want to suggest that all rural activity is dreary. Guest: Right. The craftship of picking one without damaging-- Russ: There you go. For me, it was the challenge of knowing when the tree was done. You weren't supposed to pick them all. There was some mental agility there, and judgment, but it was limited.
22:27Russ: Let's move on. An important theme of the book is the dynamism of the modern economy. Tell us what that is and explain why Japan from 1950-1990, which was seemingly a vibrant economy, does not pass the test for you of a dynamic economy. Guest: I don't really remember saying very much about Japan. I pretty much focused on Britain and America and later Germany and France. Germany is so important it could hardly be left out. I don't know what would be gained by throwing in Japan. Russ: I think your point was that much of their growth was adaptation rather than innovation. Guest: Yeah. I think that's right. The thing is, of course, in the social sciences, no statement is ever exactly right, or exactly descriptive. Russ: How honest. Guest: There were some innovative companies in Japan, I suppose--Toyota, Toshiba, Sony. But these are a tiny--it's like the sliver of land in California. These three companies were a tiny part of the GDP. So the rest of the economy, I think, was just copying from America and elsewhere. Just like most of the European economies--Germany aside--did a whole lot of copying. Later we'll get to the post-War period, I guess. Russ: Yeah. What's wrong with copying? First of all, it seems like a good thing. Guest: Oh, nothing is wrong with copying. It's a smart thing to do, right? Zvi Griliches said once--I think I quoted it in the book, I'm not sure: The Europeans are so smart, they let the Americans do the innovating, with all the failures and successes and the huge outlay for it and the huge investment that has to be made and then the Europeans just pick up the ones that succeeded, pick up the new products that got adopted, that were economical to produce and actually got adopted. But the trouble with that is that it's not nearly as much fun to adapt something as it is to create it from scratch from your own imagination. From your own perceptions and own intuitions about what would go and what wouldn't go. Now, for me a huge theme in the book is that job satisfaction differs a whole lot across countries, even in the 18 or so most advanced economies in the OECD [Organization for Economic Cooperation and Development] countries. And I think that, I endeavor to show that differences in job satisfaction are the result of differences in dynamism. But since it's a little hard to measure dynamism, even measuring innovation seems to be controversial, which surprises me--I and my co-workers did the easy thing and instead of making the explanatory variable something like the rate of innovation, we measured modern values, we measured the extent to which people are seeking an interesting job. When you are looking for a job, do you look--the World Values Survey, out of the U. of Michigan, has a whole bunch of questions like, When you look for a job, are you looking for a job that's interesting? Well, Americans and Canadians, a very high proportion of them answer yes. On the Continent, not so much. Do you look for a job where you will have opportunities to exercise initiative? Again, in America, Canada, a whole bunch of yesses. So, we constructed a sort of index of this modern mentality, which I think goes back to Britain and America in the 1820s, as we were talking about. And differences in those responses across countries does a pretty decent job of explaining differences in job satisfaction levels. Russ: I look forward to some emails from our European listeners who want to dispute those ideas and claims about the relative lack of dynamism in the European economy, but maybe some will agree.
28:56Russ: When we think of innovation, when we think of entrepreneurship and disruption, which is another theme of your book, we often think of Schumpeter. But you are not such a big fan of his. In fact, you suggest that his early work put us on the wrong path. What did he get wrong? Guest: Well, it's hard to talk about Schumpeter without talking about the German Historical School. Schumpeter came from the southern tip of Austria; he was an Austrian, educated in Vienna. But before Schumpeter, there was the German Historical School, with people like Arthur Spiethoff. They said, one of their beliefs, was that innovation comes from the discoveries of outsiders, scientists and navigators. The discoveries of scientists and navigators are noticed by entrepreneurs sitting around having coffee every morning, and they sort of know--in Schumpeter's mind these entrepreneurs have a sense of what commercial applications can be made from the scientific discoveries. And then the financiers have a sense of what new applications would be adopted in the marketplace. Schumpeter says, yes it's amazing but they really just do know; they have this marvelous acumen, this marvelous sense, the financiers, of what would work and what would not. So that's Schumpeter's thought--he says the discoveries of scientists and navigators, or some sort of immaculate conception; they do require entrepreneurs. But that's kind of a slender contribution. Russ: And--he was on to something with the creative destruction idea, though. Guest: Yes, but I just want to make--one thing I forgot to say. With regard to whether businesses are creative--lest it be misunderstood, he makes it explicit. He says almost nothing, almost never does anything creative come out of a business. Russ: That's surprising. Guest: That's a 1911 book, which was later translated into English under the title Theory of Economic Development. Russ: But his later work, he was a little more on the mark-- Guest: Yeah, his later work, he saw that the businesses could hire scientists. He was enthralled by the DuPont laboratories. So he saw that businesses could hire scientists in order to do research in house. But he never had any concept that business people, from their observations of how things are being produced and what sorts of products are being produced, could come up with better ways of producing and better products to produce. That was just outside his imagination.
33:16Russ: Let's move closer to the present. There's a widespread belief among economists, and you echo it in your book, that starting around 1970 the productivity and innovation in the U.S. economy slowed down. I'm a skeptic about that. I think of that claim--it's a common claim, but I'm a skeptic. One of the reasons I'm skeptical was--I was alive in 1970; you were, too-- Guest: Oh, yeah-- Russ: and again, it's not very econometrically sophisticated or satisfying, but when I look around and see the access of everyday people to the extraordinary set of things we have now compared to what they were in 1970, I wonder if some are measurement problems are what are the cause of that slowdown, not the reality. You want to react to that? Guest: As you know--you are a trained economist. You know that if something grows at 1% per annum, which is kind of a crawl, right? Russ: Yep. Guest: Then, thanks to compound interest-- Russ: The rule of 72-- Guest: it doubles. The rule of 72--it doubles in 72 years. So, there you go. Well, now, we haven't had 70 years since 1973; we've had only what-- Russ: 40-- Guest: We're a little more than halfway to the 72-year mark. So we're almost halfway through the process of doubling, which will be completed after 70 years. So we're seeing that there's no doubt about it, that productivity has increased. But it was going twice as fast between 1922 and 1972. Russ: So what changed? To what do you attribute that slowdown? Guest: First of all, I want to emphasize again: I'm not saying that there was a slowdown in each and every company, or each and every industry. I'm suggesting instead that there was a narrowing of innovation to fewer industries. Now, so there's this huge challenge then that's sort of thrown up at the end of the book is: How do we explain this? It was one thing to explain the birth of the modern economies. And now it's an even harder problem I think because we haven't enough time to think about it, even harder problem to explain this decline of innovation. So, my first instinct--well, I have to back up a little bit. I argue that it was the birth of modern values that provided the fuel for the modern economies in Britain and America, and later maybe less fuel but nevertheless it was there in Germany and France. So the first hypothesis that occurred to me was, Aha, maybe we've lost our modern values, or maybe they are not as strong as they were before. Well, unfortunately the U. of Michigan World Value Survey don't go back more than--I think the earliest wave of data they got was around 1980. So we can't get back to the 1960s and 1950s and 1940s. So, I gave up on that hypothesis. Russ: It could still be true. Guest: Yeah, absolutely. But what I do think I see is a rise of some traditional values that are--and the rise of some anti-modern values--that I think have caused real trouble. Russ: What are they? Guest: Well, under traditional values, I think people used to love their work. A lot of people just loved their work, going back to the 1930s. I was alive then. And I read books as a kid that suggested that people love their lives; they love the excitement, love the novelty, love the adventure. So, it seems to me, though, that that love of the stimulus of change and the challenge of problem-solving and overcoming obstacles and all that, seems to me that that sort of got pushed into the shadow by a rise of materialism. People are just going for the money. I don't know why. But it seems that the money is now an obsession almost with money. It is driving behavior to an extent that it wasn't found in the 19th century, or in the 20th century certainly right up to 1940 or even a bit later. Russ: Let me suggest what I think is a simpler hypothesis. I do think people are materially focused, but I don't know if that's changed at all. It seems to me that as we get wealthier, we value security. We value comfort. We aren't as willing to risk what we have and possibly lose it. And having said that, at the same time, I don't think there's a better time to be alive and be 22 years old and educated. And more people are educated than ever before. So I would look to things, as you do in the book, that stifle innovation rather than suggesting that we've somehow lost our innovative drive. Now, I do take your point, which you make in the book, that there are certain cultural advantages America has had in terms of willingness to take risks, willingness to fail. And I still think we have those. But I do think that there were policy and other cultural currents that are working against it. Guest: Worked against what? Russ: Against the ability and willingness of people to take chances in innovation. Right now, if you want to start a company--yes, there's red tape in America; yes, there's way too much bureaucracy; yes taxes are high, if you want to grow past a certain size--all those things are stifling. But, the ability, using the Internet, using 3-D manufacturing--I'm referring to an episode we did with Chris Anderson on that kind of innovation. The things that are coming along that let people express themselves I think are still quite extraordinary. It's just not being reflected right now in the economy, because we are in a terrible malaise in the aftermath of the 2008 crisis. But I'm much more optimistic. Guest: Well, I'm not done yet, because I also think I see a rise of some--materialism we've always had with us. In ancient times, after all, there were violent[?] materialists. But I think there has also been a rise of some anti-modern values, such as conformism. Sticking with the group; don't go in there if your friends are not going there; don't go there if your family needs you at home. Conformism and the culture of entitlement rather than feeling that you've got to earn it yourself. And then there is this sort of moving in lock step, that politicians love to peddle that. That in America we're all in this together. We're in the same boat and we are going to move forward together. And if somebody makes a bundle, well, stockholders will come in and give him suggestions for how he should share his good fortune. So I think there is a whole mess of anti-modern values now that are out there that give rise to social protection policies. Also, companies now are lobbying for carve-outs, for special regulations that will benefit them and nobody else. So it's now very much harder for--well, let me make another point.
44:17Guest: Let me lead up to this a different way. There is all that lobbying out there. What's that about? That's rent-seeking. Rent-seeking is not new. Jean-Baptiste Say talked about it in his 1800 textbook, approximately 1800. But now it's massive. And the government seems to be all too prepared to listen to every demand of every company for special treatment in the laws. You know, there's been a tremendous swelling of regulations so that the banking, the new banking law, was something like 1200 pages of text. Russ: And that's just getting started. That's not the actual regulations. That's just the framework. Guest: Yeah. Russ: It's good for lawyers. Guest: I think this means that the CEOs see that lobbying is more profitable than innovating. Russ: Yeah, that's a huge problem. And I do think it takes a cultural toll. And it's very hard to fight, because you can't really prove, and it's even hard to illustrate and make it plain to citizens, what the costs of those are. They see the benefits. They see that things are, that people are being kept in line. They don't see the fact that at the margin, when that CEO is trying to decide whether to make a better product or take a trip to Washington, sometimes it's the trip to Washington that wins out. And that's just devastating, when you do that across the whole economy. Guest: That's absolutely right. Now, the second point I want to make is: Suppose the company gets the rents it was seeking. So, now, it's more impregnable. So, now, it has less to fear from the innovations of upstarts that would unseat it. So, now it can--it doesn't have to do the defensive innovation that it was doing before. So even if it doesn't do any more new rent seeking, the old rent seeking, to the extent it was successful, has now made it less necessary for the company to do defensive innovation. And the outsiders, the upstarts who would have--the guys who would have been startup entrepreneurs, they are doing less of it because there are fewer entryways into the established industries. It just seems to me that at every turn we are digging ourselves into a non-innovation hole. Russ: Yeah. And then there's the bailouts, the do-overs; and of course, they don't go to everybody. They just go to the more politically powerful. We should let people bear the responsibility for their decisions; and then you get better decisions. If you bail them out, you get worse decisions. Kind of straightforward. Guest: A lot of those things have of course been said before. I think the originality of my book is that I am tying each one of these to innovation and arguing that innovation is the lifeblood of an economy, not only for job satisfaction but also for the number of jobs. Once companies stop being innovative then they don't need as many people. And once the economy is growing more slowly, then wealth piles up relative to wages because wages are not growing as fast any more. So people are retiring earlier and fewer people have been--more people are taking time out to do other things. It's one thing after another.
49:02Russ: You've just argued that innovation creates employment. A lot of people are worried about the other direction. Tyler Cowen, who was a guest on the program a few episodes back, and he sees a future where innovation in artificial intelligence is going to make it difficult for people who are currently working to have a job. Are you worried about that kind of change coming to the American economy? Guest: Well, I guess we have to worry about it. It's not in the book. I don't know enough about that subject. I do know some basic economics, macroeconomics, of innovation. And for example, the kind of innovation that has all sorts of benefits for jobs is innovation that increases the productivity of capital, which then lowers prices of consumer goods--well, I'm not telling this right. There's a familiar story out there; I didn't invent it, the Austrians did; and Wicksell in Sweden and so forth. The idea is that to a rough approximation we can think of consumer goods as being produced mainly with capital. And capital goods are produced mainly with labor. Now, if the innovation is in the consumer goods sector, then that's driving the price of consumer goods down relative to money wages. So real wages are rising and that pulls up employment. And that's great. But once you start having innovation in the production of the capital goods, then you've got two things going on. One, labor is physically more productive in making capital goods. But the capital goods that labor makes are now going to be cheaper, in terms of consumer goods. So that's a bummer. And that lowers real wages, and thus leads on to a reduction of labor force participation and employment. Russ: Now, you raised the question toward the end of the book of what kind of economy we'd want to live in, one that's more at rest and stable versus one that's more dynamic. And you suggest that for a long time most people wanted to live in a dynamic economy. And I'm sympathetic to that view. But then again I have a good life. What's your argument in favor of the good life and what economic policy gets us there? Guest: Well, I didn't invent the idea of the good life. Aristotle also knew it [?] 2000 years ago. But Aristotle's idea is it's a life that we admire in others and would like to imitate for ourselves, that we'd like to aspire to ourselves, those of us that can. Well, not much was done with this idea until really the end of the Renaissance, when people started talking about how human beings have creativity and human beings can think for themselves and should think for themselves. And people should be independent; they should have their own bank accounts and make their own living rather than depending on others for some sort of share of the booty or the harvest or whatever. So, over the--from around 1490 right up to 1940 you have a whole string of philosophers who are basically defining the good life as a life of adventure and discovery and exploration and meeting problems, overcoming hurdles. And creating. Creating stuff. For me, that's a good life. I'm sold on that. And I believe that would be for most people a good life. Most people would like to live that life. Though not everybody can attain it. Some people don't have the talent to be able to do much of that. But I would think that the vast majority of the population have enough talent and enough interest in it that they can share, they can take pleasure and share in what a company is doing in trying to produce a better product or produce a new product. You don't have to be an Einstein to do that. You can be caught up in that work. So it seems to me this good life is terrific and aren't we lucky that in this day and age a sizeable majority of the people can do that? But unfortunately we seem to have lost the key at some point. Something has gone wrong in our politics, and I think underlying that something has gone wrong in our values. There's too much--the pull of tradition, the pull of family ties, the pull of friends, the pull of the almighty dollar, making a buck, and conformism, all those things I mentioned--all those have conspired to make it harder to innovate.
56:31Russ: Well, the only thing I would add to that, that I think is a little cheerier, is that even folks who don't have fascinating jobs that allow for the human expression that I think you rhapsodized about, I think quite eloquently in the book--which are these things you've mentioned--challenges, facing challenges, creating, overcoming, striving. I think these are deep human urges and deeply satisfying when they are successful. But even folks who struggle to find workplace activity that does that have leisure activity now that they didn't have 50 and 100 years ago. They have the time to do things, and the things you can do in your time now are really rather remarkable. You can connect with people around the world via the Internet. You can learn about things you didn't know about. You can be wowed and amazed through the visual arts in ways that were unimaginable 25 and 50 years ago. So, I'm somewhat more cheerful on that perhaps than some. But the point I want to close with is that you are suggesting that the current state of the U.S. economy is not just a temporary problem related to the 2008 crisis, but rather something more systemic. Guest: Right. Russ: And I want to ask you to close on this issue. What have you learned from the crisis that has forced you--if anything, and I don't know if there is anything, but if there is anything that has changed you, the way you look at economics, the economy, and how do you think that might change the profession going forward? Guest: Well, I think that the book has changed the way I think in the course of working through it. Some years before I started the book, I didn't really appreciate how important it is for human satisfaction to be engaged in doing rewarding things. And now--and I think this was so important in America's history, this activism, this love of jumping into a problem and interacting with others and dealing with it. But there's this whole counterculture rising now, is rising up, which instead looks at passive pleasures, like going to museums, going to a sports stadium, taking walks in the park, amenities. All of that leisure. Leisure, leisure, leisure, leisure. Gosh, I can't think of anything--well, maybe I should put it in the form of a question. Isn't it pretty passive to be sitting in front of a laptop or other computer looking at the screen? Isn't that--playing computer games or looking at information coming in on the computer--it seems to me this is very passive. I wouldn't go stir crazy--I would go out of my mind doing that all day. I've got to be involved in something. I hope another 400-page book won't get ahold of me because that's going a little too far. That's overdoing it. But I think that people really need to be engaged in doing things, doing rewarding things, and having the excitement of striving. And all this talk about the quality of life and clean cities and clean air and nice amenities like-- Russ: A farmer's market you can visit on a Sunday after your stroll from the park-- Guest: Yes. Right. For me, that's not making it. And yet that seems to be the direction in which we are going. Russ: Well, yeah. In defense of the other side, I'd suggest that right now there is somebody listening to this who is walking in the park, who is being contemplative and who is struggling to understand what we are talking about; and I don't consider that passive. It's a different kind of involvement than perhaps in the past. But I think it is the wave[?] of the future. And I think it's always going to be a challenge to make it come to life, and to make it real, and to make it vivid in a way that, say, watching a sitcom maybe isn't. But there are still lots of things that we do that aren't as dramatic as, say, sculpture, that I think are very real. But I was asking you more about the crisis. Do you think, do you feel, that the financial crisis and the current state of the economy has challenged any of your views on macroeconomics or on policy that you've had to deal with or change? Guest: Well, I think that it has. I think the crisis did underline the short terms of the financial sector, the willingness to take risks, the leverage, like [?] for the sake of huge returns. Never mind the risk; after all it's not their money. So, I think the financial crisis was a demonstration of that. Whether I learned any other lessons from it that bear on innovation--I think that the causes of the financial crisis have something to do with the slowdown of productivity growth, brought about by the slowdown of innovation. I think one Administration after another was throwing ammunition at the economy trying to boost employment, trying to bring back the low unemployment rates and the high growth rates of pre-1973. And they were doing reckless things to try to do that. Huge budgetary deficits under Reagan. Huge tax cuts by George W. Bush in 2001 and 2003. And then pumping up Fannie Mae and Freddie Mac and pressuring the banks to lower loan standards. Russ: That was a bipartisan effort. Guest: All this was to replace the prosperity that we lost when the innovations slowed down. So, yeah, in a way I think that the financial and the fiscal crises both are demonstrations and reminders of the poor condition into which the American economy has fallen in the past 40 years.

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