Edmund Phelps
With this monograph, we have reported statistical evidence supporting the thesis that grassroots innovation, economic growth, and job satisfaction are linked to the values a society embraces. Values at the core of modernism—independence, initiative, achievement, and acceptance of competition—are strong in the countries with high indigenous innovation. An index of a people’s modernism accounts for virtually half of intercountry differences in productivity growth over recent decades. We have also reported theoretical analyses of the effects, long run as well as short run, of the two types of automation that have emerged.
Now, in the West, there is extraordinary discontent and division—a vast alienation and dissatisfaction with the “system” both political and economic. In this epilogue we will consider how our perspective and findings may, to some extent, illuminate what is behind these developments and what steps might be taken toward remedying the division and ending the discontent.
There is more than one discontent. And innovation, or the loss of it, plays a part in all of them.
One discontent is the widespread frustration over economic growth or the lack of it. “For most people,” as Ray Dalio said about America and could have said about the West, there has been “little or no real income growth for decades.”1 Many people have not seen their earnings increase much over what their parents had earned.2 This reflects the continuing slowdown of the West that began some five decades ago in America and later spread to Europe—a slowdown in the growth of total factor productivity.3
The cause of the slowdown, in our view, is a serious loss of innovation in the aggregate—relieved only briefly by the advances in information and communication that came out of Silicon Valley. Our research in this volume has shown that this deficiency is less a loss of exogenous innovation driven by scientific discovery than it is a loss of indigenous innovation in the long-regarded “lead economies”—those in America, Britain, and France.
The decline of innovation has brought a whole syndrome of ills: not only slower growth of wages but—ominously—a long slide in rates of return to investment. These ills have led, in turn, to a serious contraction of male labor force participation and reduced investment.4 In some countries there has been a widespread disappearance of many rewarding jobs and satisfying careers. In American data, this is evidenced by the long downward trend of job satisfaction reported in household surveys.5
This is extraordinary. One would have to go back to postwar Britain, 1945–1975, or as far back as the Weimar Republic, 1918–1933, to find such stasis in an important Western economy.6 The nations of the West—especially those that were in the lead—are in grave need of a return to high levels of economic growth, and human flourishing.
Besides the slow growth of incomes in general is a different discontent that began in the 1980s and grew stronger in some countries than others. This is the fall in the relative wages of middle-income earners in several (though not all) Western economies—typically, workers engaged in farming, manufacturing, or mining and stranded in rural areas.
Trade may have played a part. New competition coming from farms and factories in Asia has surely had a negative impact on real wages in some industries. But whether this impact comes close to explaining the decline of relative wages in farming and manufacturing is not clear. It is interesting that the countries that have long been regarded as the “innovation nations”—America, Britain, and France—are the ones that have the newly distressed regions, while the countries that have always been regarded as “trading nations”—Germany and the Netherlands, at any rate—have not been afflicted with such regions.7
Less known is the new competition coming from within: highly able people in cities have managed to raise their incomes by mastering new technologies while most rural people have not had the opportunity.8 As a result, these workers in the middle of the wage distribution—at the 50th percentile—have not kept up with those who climbed to the high end of the distribution—say, the 90th percentile.9 (It appears, then, that the loss of much innovation has been a drag on all incomes, while the innovation that remained has pulled up urban wages more than rural wages. Hence the loss of relative income in rural areas.)
This failure to “keep up” has distressed working-class people in industrial and rural regions. It is thought that they have a sense of being disrespected—knowingly “left behind.” In France, the farmers and truckers reacted with violent protests. In America, home of rugged individualism, they have turned to drugs and switched their votes.
In times past, workers faced with such a development would have moved to cities in the hope of finding work at their former pay. But in the present time, with innovation generally weak in most industries, these workers might judge that they could not find work quickly enough to make it worth the cost and stress. They are made less mobile still by the inability to sell their house (except at a price insufficient to buy a house elsewhere) and to take their medical insurance with them.
It must be said that it is not only the decline in relative wages that has aroused anger among middle-income workers. It is also the corruption, barriers to competition, cronyism, and other obstacles that have blocked these people’s sense of having a “fair shot.” They lack the connections, or “strings,” that they—for the most part—would need to get ahead.
In addition, with the rise of “identity politics,” some working-class regions may have come to feel they have not received their fair share of government benefits, whatever the truth of the matter. In France, the Yellow Vest protesters obviously felt alienated when their taxes were raised for projects not of their choosing.
A striking reaction is the formation over recent decades of “populist” parties in France, Italy, Germany, and Spain.10 Now, populist strains of one kind or another have arisen in the governing parties of America, Britain, and Sweden. There have been consequences. When the Italians were governed by the Fascist Party and Mussolini ran the economy—practicing his doctrine of corporativismo—that was the end of their capitalism and their democracy. Now there is fear in America that extremists will replace America’s capitalism and democracy with Trumpean corporatism or socialism.
Again, it is impossible not to think that the alienation and angry reactions in the West—particularly in America—would have been considerably less had there not been a serious weakening of indigenous innovation in the West.
Now, a new source of discontent has descended on the West. Advances in artificial intelligence have created expectations that further innovation will bring radically increased automation over the next several decades. This prospect raises the question of what kind of society we can have if automation brings an invasion of robots displacing humans from their work.
It is clear that few people in a nation can have hopes of living the good life if there is little opportunity for work that is rewarding. A nation might fall apart if a great many people lacked the satisfactions of agency, succeeding, flourishing and, at a minimum, self-support.
How, then, from the perspective of the present volume, might a nation overcome these three challenges?
Clearly, regaining widespread flourishing and rapid wage growth in all sectors will require restoring the substantial loss of indigenous innovation that has hung over the lead economies for most of the past five decades. Our research for this volume has found evidence supporting the theory advanced in my book Mass Flourishing that high indigenous innovation in a nation derives from the dynamism of its people—their desire and capacity to innovate.11 And this dynamism, we confirmed here, depends on the strength of modern values—values under the headings of individualism, vitalism, and self-expression—relative to traditional values.12 We found that modern values were generally positive for economic performance and some traditional ones negative.
These findings point to a way forward. To regain the high “desire” to innovate, it will be important to cultivate the “positive” values and not the “negative” values—to “accentuate the positive,” as a pop song put it. A wide-ranging change in the books studied in high school may be essential. It might also help to reintroduce music and art into high school and middle school curriculums. (Students are more likely to exercise creativity in their work if they have had the experience of expressing their creativity in their school years.) It might also help to step up federal funding of the arts.
These steps and more will surely be necessary to inspire a revival of modern values. Whether these steps will be sufficient is an open question.
Yet dynamism requires a “capacity” to innovate as well as a “desire.” By now, there is a vast accretion of policies, laws, and deal-making impeding or blocking new entrants bearing new ideas. It would be a major step forward to restore antitrust policy. Stripping away overreaching regulation would likely be a huge help to many would-be innovators. Getting rid of the close ties between powerful corporations and the government—both the legislative and executive branches—would also be helpful. (That will be an unending struggle, but progress can be made.)
Another crucial step is to minimize the bureaucracy involved in starting a business, registering property, or obtaining building permits. Philip Howard has documented cases of regulations so prescriptive that they reduce the role of humans to one of interpreting the regulations rather than applying judgment and creativity.13
Our findings also point to initiatives that may not be helpful. While some attribute the slowdown to a loss of scientific advances,14 added to by cutbacks in national science foundations,15 our findings jibe with the view that (until recent decades, at any rate) most innovators have come from the grass roots on up: from ordinary people at work in an economy open to thinking of better ways to do things and better things to make.
That does not mean that cutting funding to governments’ science foundations would be desirable. But it does mean that there are no empirical grounds for believing that increased funding of such foundations would substantially restore innovation.
Next, how might a nation best respond to the casualties of the “new competition” referred to earlier? As suggested earlier, labor markets do not work in a smooth, textbook fashion when there is little or no productivity growth creating job vacancies, so that climbing back up the ladder is more difficult for these workers at present than it was in earlier times. A return to high innovation would have the desirable side effect of facilitating their climb back to the relative wages they were earning before—back to their former rung on the ladder.
Lastly, how best to respond to the increased automation that artificial intelligence is expected to bring and is already bringing? For one thing, society will have—roughly speaking—only gainers if the total innovation brings enough capital saving that it ultimately reverses the labor saving created by the automation. Second, the government might subsidize every company’s employment of low-wage workers to induce it to employ more of them and thus bid up wage rates at the low end. And we might expand the Earned Income Tax Credit to aid individuals as much as it aids families. In this way, society could protect working-class people from losing their jobs to robots.
Furthermore, it is essential to resist some novel directions recently proposed by a few policy advocates. Work is fundamental. That has been noted by many great scholars—from the economists Thorstein Veblen and Alfred Marshall to the philosophers William James, John Rawls, and Amartya Sen to the sociologists Gunnar Myrdal and William Julius Wilson. My book Rewarding Work discussed the manifold rewards in the workplace, particularly in a dynamic economy.16 But the argument can be simply stated:
We must oppose the universal basic income, not only because it is a lamentable use of public revenue that would be better directed toward pulling up the wages of low-end workers to a level enabling their self-support, which is essential for people’s self-esteem—either through earned-income tax credits or through subsidies to companies for their employment of low-wage workers, thus pulling up workers’ pay—but also because it is apt to draw or keep many people and also their children away from work, which is—for most people, at any rate—the only available avenue to personal fulfillment and, indeed, to their involvement in the world.