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Patrick Luciani: Why does Canada’s productivity lag? It’s the culture, stupid!

Commentary

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.

Michael Bonner: Conditions are ripe for a revolution from the Right

Commentary

Your typical Canadian is not going to compare him or herself to formerly starving children on another continent. This will be the case, no matter how often we are told that the world is generally getting better. The problem is that the usual figures—rising incomes and life expectancies, plummeting infant mortality and poverty—are worldwide averages. People will rather think of their economic situation in relation to those of their parents and grandparents; they will compare their present condition to what it was in previous years. When the average Canadian does this, he or she realises that the cost of housing is exorbitant, the health-care system is slow and inefficient, and wages struggle against an ever-rising cost of living. We are working harder than our parents and getting less.

Such problems are now found everywhere throughout the Western world and will be with us for some time. The political and social tensions that attend them make headlines almost daily in every major democracy. Recent political enervation of Great Britain, the pressure-cooker mood of France, and outright warfare in Ukraine darken an already grim mood. But nowhere are contemporary problems more consequential than in the United States. America has been on the brink before, and it has successfully pulled back, of course. But the case for doom is more convincing now than at any other time in the last 50 years or so, and Peter Turchin is here to explain why.

Turchin’s argument in his new book End Times goes like this. Throughout much of the 20th century, typical American wages grew much faster than inflation. But this stopped in the 1970s, when median wages began, on the whole, to stagnate. Even when they have risen in absolute terms (as they have in some cases), their purchasing power has declined. The price of labour has remained artificially low, partly because of a massive increase in labour market participation from the 1950s onward and partly because of low-skilled immigration in more recent years. The result of all this has been an enormous upward transfer of wealth away from the middle and working classes to the ultra-rich. But it gets worse. In 1976, the average cost of studying at a public university was $617 annually; in 2016 it was $8,804 and has gone up since then. So a typical person earning the median 1976 wage would need 150 work hours to pay for a year of university, but now you would need 500 work hours. Similarly, a median-wage worker must now work about 40 percent longer in order to afford a typical house.

The non-economic state of affairs is no better. Turchin notes that height is a good proxy for overall well-being. If an archaeologist found that skeletons in successive layers of a digging site were progressively taller, he or she could safely infer improving living conditions, better diet, and relative stability. In America, heights reached a peak in the 1960s and have been declining. In other rich democracies, though, they have continued to rise. Similarly, American life expectancy began to fall in the 2010s, and the Covid-19 pandemic has accelerated this downward trend.

Amidst all this “popular immiseration”, Turchin notes a huge enlargement of the American elite, or “elite overproduction”, as he calls it. This can be measured by the number of people with higher degrees, as well as the growth in the top 10 percent of incomes—a state of affairs exacerbated by diminishing median wages, growing labour-force participation, and a growing economy. In other words, elite classes get richer and their numbers grow as more and more people try to leave the middle classes and join them. The problem is that the number of high-status positions within government and elite professions has hardly changed. There are too many elites, or aspiring elites, and not enough for them to do.

Past experience suggests that elite overproduction is extremely dangerous. Turchin reminds us of the revolutionary tendencies, not of the immiserated poor as popularly imagined, but of disaffected elites. Think of the disgruntled lawyers of 18th-century France, or the Taiping Rebellion in China (1850–1864) which was a gigantic uprising against the reigning Qing led by a group of malcontents who had repeatedly failed the civil service examination. But Turchin rehearses many other examples. The revolution is not yet upon us, he notes, but intra-elite competition over a small number of high-status positions is becoming ever more aggressive and acrimonious. One of the main weapons in this war is so-called cancel culture, by means of which rivals can be publicly shamed and disqualified from employment. This technique used to be confined to politics where many candidates compete for a single position: revealing gaffes, faux pas, or other real or imaginary failures was the easiest way to get ahead. Now the technique has spread to the higher professions. Similarly, the proliferation of diversity and inclusion bureaucracies and compliance officers, and so on, can be understood as an effort to create new high-status positions for the elite. But I would not call it especially successful so far.

Turchin’s observations carry some important implications. American elites have screwed up badly, and earned the disapproval they now face. But, more generally, they have failed to maintain any sort of connection with, or basic respect for, the great mass of Americans. Elite contempt in this connection is embodied in Obama’s dismissal of the immiserated working class of the Rust Belt who “cling to guns and religion”; in Mitt Romney’s ignoring the “47 percent of the people” who are “dependent on government” and who “believe they are victims”; and in Hillary Clinton’s “basket of deplorable” comment. Those are only the three most prominent expressions of elite contempt for proles who failed to find a new place within a globalised economy. But there are other examples in the form of right-wing attacks on blue-collar unions, corporate America’s embrace of identity politics, and advertising campaigns that seem to denigrate or mock the values of ordinary people.

This is how Turchin sums up the problem:

The American ruling class today finds itself in the predicament that has occurred thousands of times throughout human history. Many common Americans have withdrawn their support from the governing elites. They’ve flipped up “a throbbing middle finger in the face of America’s ruling class.” Large swaths of degree holders, frustrated in their quest for elite positions, are a breeding ground for counter-elites, who dream of overthrowing the existing regime. Most wealth holders are unwilling to sacrifice any personal advantage for the sake of preserving the status quo. The technical term for it is “revolutionary situation.” For the ruling class, there are two routes out of a revolutionary situation. One leads to overthrow. The alternative is to adopt a series of reforms that will rebalance the social system, reversing the trends of popular immiseration and elite overproduction.

Turchin’s idea of a counter-elite is an interesting one. The archetype would be the likes of Julius Caesar or Robespierre—successful revolutionaries who degraded and overthrew a moribund patrician order. In our own time, we have the example of Donald Trump who embodied the “throbbing middle finger in the face of America’s ruling class,” in Turchin’s quotation. Incidentally, that phrase is from Tucker Carlson’s 2018 book Ship of Fools which is essentially an exposition of all the elite failures that provoked the election of Donald Trump. As far as Turchin is concerned, Carlson is “a very dangerous man”. Though the Trump Administration failed, the counter-elite insurgency has many adherents and will continue under the leadership of Tucker Carlson and his ilk. Turchin’s book went to print before Rupert Murdoch fired Carlson from Fox News, but Carlson’s new Twitter platform, which is more popular than ever, suggests that Turchin’s analysis is right. If Trump returns to the White House, or if another president carries on his legacy and successfully deposes the American elite, Carlson’s influence will be one of the main reasons why.

Back to the Trump Administration. One of Trump’s main advisers, Steve Bannon, was a self-described Leninist. “Lenin wanted to destroy the state and that’s my goal too”, Bannon famously said. “I want to bring everything crashing down and destroy all of today’s establishment.” Bannon and his followers (and he still has some) do not belong to the Republican tradition of Reagan and the two Bushes. They are revolutionaries. In one very obvious way, this should not be surprising. America’s founding myth surrounds an actual revolution; the populist, fiscally-conservative movement known as the Tea Party founded in 2009 was notionally animated by the revolutionary spirit of 1776. But something different is brewing now.

Enter Patrick Deneen’s new book Regime Change. It is ostensibly a sequel to his 2018 work Why Liberalism Failed, which reiterated many long-standing criticisms of liberalism, but without political recommendations. Regime Change notices much of the same popular immiseration presented by Turchin and lays the blame on…liberalism. I am of two minds about this blame. On the one hand, it seems obvious that liberalism was destined to loosen or dissolve ties to places and persons since that is what John Stuart Mill and his ilk intended it to do. And everyone from de Maistre onward has been complaining about this tendency. Because of its power to dissolve bonds between individuals, liberalism also contains the seeds of tyranny.

This idea was most famously asserted by Alexis de Tocqueville and has been explored by others since the early 19th century. Deneen reminds us that J. S. Mill actually embraced this idea of a liberal despotism, in that he saw the greater part of the populace as inherently conservative and resistant to individual autonomy which a dictatorial elite would have to impose. Contemporary liberals seem to have forgotten this: they will scoff at Deneen’s reiteration of the same analysis, though they would benefit most from taking it seriously.

On the other hand, I wonder whether American social decline rather invited heavier emphasis on the atomising tendency of liberalism. This is a problem worth pondering because the social decline now seen in the liberal West is also found in such obviously non-liberal places as Russia and China. So the real culprit may be modernity itself, or the sort of rapid technological progress that liberalism is unable to control or temper.

However that may be, both Turchin and Deneen seem to agree with the new American revolutionaries that the American elite is bloated, parasitical, and incompetent. And the insurgents are unanimous in attacking the elite’s ever more deranged emphasis on personal autonomy, total economic freedom, supremacy of market forces, and the doctrine of a borderless, globalised world as a set of self-serving and harmful ideas.

But, unlike Bannonism-Leninism, Deneen’s vision of deposing the American elite rests on a broad philosophical basis. Regime Change revives the Aristotelian political analysis of the Many and the Few, and urges the balancing of antithetical class interests within a “mixed constitution”. The political recommendations all boil down to replacing a self-serving and ham-fisted elite with a new one that shares the virtues of the middle and working classes: love of stability, attachment to family and religion, localism, patriotism, and so forth. In Deneen’s view, this would mean “the raw assertion of political power by a new generation of political actors inspired by an ethos of common-good conservatism”. Elites will bristle at that phrase, but for no good reason. Something like Deneen’s vision has happened before in America when the Gilded Age of the robber barons gave way to the New Deal, and many elites sank into oblivion and a new middle class arose—a transformation which Peter Turchin also notices as one possible way out of the present mess.

But that is an unusually peaceful example. More typical in human history would be either outright civil war in which one group of elites kills off another, or mass executions and exiles such as those at the end of the Roman Republic, the Glorious Revolution in England, or the French revolutionary Terror. Deneen fears and condemns violence, but Turchin reminds us that civil war is a real possibility.

Despite historical precedent, I am inclined to believe that, in the present age of intellectual paralysis and exhaustion, civil war is probably not going to happen. Moreover, the present non-aristocratic elite, unattached to any particular place, deriving power from the manipulation of narratives and abstract ideas, would be very hard to pin down and destroy. But they may very well be done in, not by a new political alliance, but by the very market forces and long-term trends in which they once placed so much confidence.

I am thinking here of rising interest rates, reindustrialisation, and demographics. The rising cost of money should mean that investment in start-up jobs and hyper-financialisation, on which the elite have thriven, cannot be long for this world. Recent layoffs in the media and in tech appear to support this prediction. As America and the West re-jig supply chains away from China, off-shoring will mutate into “friend-shoring”, and money will flow into enlarging the American industrial plant. This will add to discontent, as technocratic elites grow less relevant, and gradually sink back into the middle classes. The demand for blue-collar skills will grow, and those jobs will become increasingly lucrative. Meanwhile, the cohort of the more rooted, more religious people favoured by Deneen will grow, since they tend to reproduce more abundantly than other groups. Meanwhile, the Baby Boomers—the largest generation ever, and over-represented in the American elite—will die out, making room for their children and grandchildren.

If I am right, the elite will shrink inevitably, though it may be hard going as that happens. The worst fears of Turchin and Deneen may not come to pass; but there will be radical change, whether we like it or not. But if there is one thing we should take from these books it is that the defenders of left-liberalism stand only for the status quo. They have become, in effect, conservative. The new revolutionaries are coming from the Right.