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October 11, 2006
Nobel thinking
Monday, it was announced that Edmund S. Phelps of Columbia University is this year's winner of the Nobel Memorial Prize in Economic Science for his work on the inflation-unemployment interaction. Since everyone else will be cherry-picking his views, let me add mine.
Highlights from his op-ed piece in Tuesday's Wall Street Journal - Dynamic Capitalism.
On the dynamics of capitalism:
First, virtually everyone right down to the humblest employees has "know-how," some of what Michael Polanyi called "personal knowledge" and some merely private knowledge, and out of that an idea may come that few others would have. In its openness to the ideas of all or most participants, the capitalist economy tends to generate a plethora of new ideas.
Second, the pluralism of experience that the financiers bring to bear in their decisions gives a wide range of entrepreneurial ideas a chance of insightful evaluation. And, importantly, the financier and the entrepreneur do not need the approval of the state or of social partners. Nor are they accountable later on to such social bodies if the project goes badly, not even to the financier's investors. So projects can be undertaken that would be too opaque and uncertain for the state or social partners to endorse. Lastly, the pluralism of knowledge and experience that managers and consumers bring to bear in deciding which innovations to try, and which to adopt, is crucial in giving a good chance to the most promising innovations launched.
On the purpose of innovation:
The main benefit of an innovative economy is commonly said to be a higher level of productivity -- and thus higher hourly wages and a higher quality of life. There is a huge element of truth in this belief, no matter how many tens of qualifications might be in order. Much of the huge rise of productivity since the 1920s can be traced to new commercial products and business methods developed and launched in the U.S. and kindred economies. (These include household appliances, sound movies, frozen food, pasteurized orange juice, television, semiconductor chips, the Internet browser, the redesign of cinemas and recent retailing methods.) There were often engineering tasks along the way, yet business entrepreneurs were the drivers.
. . .
I would, however, stress a benefit of dynamism that I believe to be far more important. Instituting a high level of dynamism, so that the economy is fired by the new ideas of entrepreneurs, serves to transform the workplace -- in the firms developing an innovation and also in the firms dealing with the innovations. The challenges that arise in developing a new idea and in gaining its acceptance in the marketplace provide the workforce with high levels of mental stimulation, problem-solving, employee-engagement and, thus, personal growth. Note that an individual working alone cannot easily create the continual arrival of new challenges. It "takes a village," preferably the whole society.
Let me reinforce the collective and organizational notion of innovation (and capitalism). I have noted in earlier postings this week the problem with the "great man theory" as applied to economic growth. We all know that innovation/knowledge/ideas/information is the key to growth - not just increased utilization of labor and capital. But we tend to focus our attention on the big breakthrough ideas and the geniuses who produced them. In truth, it is the multitude of ideas - some that succeed and others that fail - which result in innovative growth. It is the "the pluralism of knowledge and experience" which Phelps cites as the key dynamic of capitalism.
As we continue to refine our national innovation system, let us keep that key feature in mind: it takes a village.
Posted by Ken Jarboe at October 11, 2006 8:48 AM
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Comments
Isaiah 65 - Verse 21
And they shall build houses, and inhabit them; and they shall plant vineyards, and eat the fruit of them.
Real economics just don't but do to build a house. The house then becomes theirs to keep. They construct and they market the house. The customer that bought into their money worth was sold value in trade for exchange and the money stores value but print, as you do know, makes more of the money just paper.
Posted by: Gem Hudson at October 11, 2006 5:10 PM