The Hub’s resident book reviewer Patrick Luciani tackles My Journeys in Economic Theory by Edmund Phelps, published by Columbia University Press in 2023. Watch for Patrick’s book reviews every two weeks at thehub.ca.
If there’s one thing that has mystified Canada’s government economists, it is the country’s perpetual low productivity performance. They lament that we lag in innovation and the diffusion of technology once we have it. We thought it was a question of dishing out more subsidies and incentives for businesses to innovate and catch up to the Americans, but things are only getting worse.
In 2000, we were 82 percent as productive as the average American worker. By 2020, that has dropped to 77 percent. We are doing worse on that scale than Italy, France, the U.K., and Australia. Imagine the French are doing better with all their vacation time, meal breaks, and laws forbidding workers from taking their work home. According to one study, the Canadian worker would have to put in 30 percent more hours to catch up to the same productivity as the American worker. Canada’s most productive firms aren’t keeping up with world-leading firms. Ottawa is trying once more by launching the Canada Innovation Corporation (CIC) to boost innovation and more R&D. Unfortunately, cajoling firms to catch up won’t work.
The reason may be found in the work of economist Edmund Phelps at Columbia University, who won the Nobel Prize in Economics in 2006. His latest book with the rather uninspiring title of My Journey in Economic Theory—but don’t let that throw you off, it’s a great read—Phelps has spent the last twenty years thinking about why some countries are better than others when it comes to innovation and inventing things. His answer is in a country’s culture rather than incentivized government programs.
To understand what Professor Phelps is getting at, we need some history of what drives economic growth. For the Austrian economist Joseph Schumpeter, who worked at the turn of the last century, capitalist economies are never static and always evolving. Capitalism drives new innovations that disrupt old ways of doing things, leading to what he termed “creative destruction” that forces out old ways of doing things. At the heart of free market systems is the entrepreneur, who recognizes the power of new ideas and brings them to market. Schumpeter recognized that the entrepreneur was the driver of economic dynamism. Schumpeter had no time for the ingenuity of businesspeople and bankers, who he said showed no creativity.
In the mid-1950s, another Nobel economist, Robert Solow, added that productivity growth was driven by these so-called “exogenous” shocks from people’s minds, from Ely Whitney and Thomas Edison to Steve Jobs. Solow’s contribution to economic growth was still in the spirit of Schumpeter in that they couldn’t completely explain why these ideas germinated.
Phelps asked what if these new ideas and innovations didn’t appear without explanation but were actually “endogenous.” That is, factors inside the economic system could explain innovations. Could it be that the average worker was capable of generating ideas and innovations within a country, not just those of scientists, inventors, or entrepreneurs?
Phelps theorized that to achieve “wide indigenous innovation in a country, it is crucial that the many workers have the qualities needed for dynamism.” But what is this dynamism, and how do you measure it?
Here, he came up with two cultural variables that could be measured: the importance of work, the incentive to get up each day and go to work, and involvement in one’s work, the willingness to do a good job. Given Europe’s crafts and guild history, Phelps assumed Europeans would score higher on both variables, but it was the Americans who scored higher on these variables than Germans, the French, Italians, Brits, and Canadians. He concludes that a nation with the right values “is capable of much innovation beyond what may be imported from abroad [or] opened up by new scientific discoveries at home.”
If Phelps is right, a country’s values are crucial to driving prosperity on a massive scale, an idea he developed in his 2013 book entitled Mass Flourishing. The genius of prosperity is found not in government stimulus programs but in the ethic of work and discovery in average citizens who take pride in their labour. Prosperity and economic growth driven by ideas is a process initiated from the bottom up, not the top down. Institutions such as property rights and stable government are necessary in Phelps’ world, but they play supporting roles rather than take centre stage. The real action is on the ground where the spirit of the average worker flourishes.
This view of the future starkly contrasts with the more pessimistic conclusions in Bradford DeLong’s recent book Slouching Towards Utopia (2023)—a book I reviewed last year—that concludes the era of growth in America started in 1870 died around 2010 when America’s engine of productivity began to stall under a failed neoliberal democracy. Phelps isn’t naïve to ignore the climate crisis or the lack of skills many need as we move to a world that demands technical expertise, but his vision of the future is more encompassing, a future that relies on the culture and values of ordinary people and not just the skills of trained experts or hard-driving entrepreneurs.
If culture and work values play important roles, where does that leave public policy in the race to catch up to America’s higher levels of productivity? First, we should acknowledge that top-down programs have limited value in stimulating innovation. Second, public funds might be better spent on instilling the virtues of pride in work as soon as kids start going to school. On a grander scale, if culture matters more than the political and economic factors that ended the long twentieth century, we might have the good fortune to end up living in Edmund Phelps’s world rather than Bradford DeLong’s.