Rise of New Corporatism Dims Capitalism, Argues a Nobel Laureate (Hint: Not Krugman)

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The New York Sun

A Nobel laureate in economics who teaches at a New York-area Ivy League university is out with a new book attacking the Bush tax cuts.

Relax, it’s not Paul Krugman.

The professor is Edmund Phelps, who teaches at Columbia, not Princeton. And if you can get past the sniping at the Bush tax cuts (a big “if”’) —  there’s some value to be extracted from his book, Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change, which is just out from Princeton University Press.

Professor Phelps divides economies into three categories — modern capitalist, socialist, and corporatist. He argues that the modern capitalist variety is superior to both the socialist and corporatist variety, both by the measure of promoting labor force participation and by the measure of reported job satisfaction and life satisfaction.

So far, so good. Even if, as Professor Phelps writes, “over the years, more and more in the general public came to be persuaded by the arguments of Mises and Hayek against the socialist economy,” it can only help to have the arguments restated anew, and supplemented, by an economist with the stature of Professor Phelps.

Things get even more interesting when Professor Phelps tries to trace what he sees as a decline in modern capitalism beginning as early as the mid-1960s and continuing through the present day. One suspect is what the author calls the “new corporatism”: “Regulations of industries are instituted, aimed at shielding companies or workforces from competition. …Shakedowns of companies by communities, nonprofits, or governments extract donations or other accommodations….The new corporatist economy, then, is pervaded by fears of holdups by the government, by stakeholders, by organized labor, and by an ocean of persons and companies ready to litigate.”

Professor Phelps decries the influence of what he calls a culture of entitlement. “Many academics, once researchers endlessly testing ideas, now rate themselves so highly that they pontificate with no research at all,” he writes (take that, Professor Krugman). “The growing sense of entitlement helps explain the ever-rising outlays for the safety net, which, in artificially raising economic independence beyond what people’s private wealth would provide, makes it harder to obtain employee loyalty and employee engagement. The attitude of entitlement can only make it harder for a start-up firm to obtain employees who take the initiative, give a hand to others, and lend the concentration and judgment on which success importantly depends.”

The author is on thinner ice, in my view, when he asserts that “wealth competes with innovation seeking.” He writes that, “given the monetary rewards, more and more able and talented young people chose to go into the financial sector, rather than into the business sector.” He writes, “few would deny that lives or earning and wealth accumulation do not offer the gratification and pride that lives of creation and innovation offer.” But that is a false dichotomy. Which sector, “financial” or “business,” is Warren Buffett in? Which sector is a partner in a Silicon Valley venture capital firm in? At the very very top, anyway, the monetary rewards are richer for technology entrepreneurs than for investment bankers.

Also unconvincing, in my view, is Professor Phelps’s claim that “the resurgence of family values” has “drained companies of some of their innovative spirit.” His claim that “more and more people accept the positions taken by their political party or religion or friends rather than working out their own positions. It would be surprising if this conformity did not weigh on innovation in the business economy.” If anything data show that since the 1960s in the United States political party affiliations have eroded, and independent thinking and individual choice in both politics and religion is on the rise.

As for the author’s claim that “family values” are somehow at odds with commercial success or economic growth, the best counterargument is his own acknowledgements section, the first sentence of which counts among his “many advantages” in his career his “parents” and “a happy marriage with my wife Viviana.”

In a footnote, Professor Phelps recounts that in the winter of 1969-1970, he watched with the philosopher John Rawls from the Center for Advanced Study in the Behavioral Sciences as radicals occupied a building on the Stanford Campus and set it afire. “Later they attacked the Center, burning a bank of offices where we worked. Rawls’s manuscript survived, as did mine, though a nearby one was a total loss.”

Modernity is great, or, as the late Wall Street Journal editor Robert Bartley put it, “on a net basis, modernity is good for you.” The question of whether the late-1960s radicals were rebelling against tradition or against modernity is complicated, a topic for a book, or a column, of its own. But surely even a Nobel laureate economist ensconced at Columbia can figure out that whatever the great villain is in the story of the American economy or culture since the 1970s, it isn’t “the resurgence of family values.”

Mr. Stoll is editor of FutureOfCapitalism.com and of Smartertimes.com.

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