February 27th 2016


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Articles from this issue:

COVER STORY SSCA: Check out this inversion of the Parental Control system

CANBERRA OBSERVED Barnaby Joyce likely to give Cabinet a kick-along

ALCOHOL Studies confirm benefit of earlier nightclub closures

HISTORY OF TAIWAN Post-WWII Japan's loss is Chiang Kai-shek's gain

SPEECH IN PARLIAMENT Welfare of children at heart of surrogacy inquiry

EDITORIAL Syria agreement first step to ending the carnage

EDUCATION Discounting Christianity in schools denies history

WORLD CONGRESS OF FAMILIES Diversity's American dream: genderless parenthood and apple pie

ENVIRONMENT Harry Butler: a victim of deep-green politics

EUTHANASIA Legitimate denial of choice at end of life (Part I of two)

ACTIVISM Safer schools or a radical Marxist sexual revolution?

UNITED STATES Big Brother v the Little Sisters: Obama takes nuns to Supreme Court

MUSIC Oppositions reconciled in logical harmony

CINEMA Of heists and hedge funds: The Big Short

BOOK REVIEW Alarms and arms

BOOK REVIEW The human factor

LETTERS

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BOOK REVIEW
The human factor




News Weekly, February 27, 2016

 

MASS FLOURISHING: How Grassroots Innovation Created Jobs, Challenge, and Change

by Edmund Phelps

 

(Princeton University Press, Princeton, New Jersey)
Paperback: 378 pages
ISBN: 9780691165790
Price: AUD$48.95

 

Reviewed by David James

 

There is something faintly amusing about an economist, in this case a Nobel Prize winning economist, discovering that human beings are actually at the centre of all economic activity.

In his book Mass Flourishing, Edmund Phelps, who won the 2006 Nobel Prize for his analysis of inter-temporal trade-offs in macroeconomic policy”, lays out his ideas of how to get the kind of large-scale economic leap forward that is required to maintain modernising momentum, especially in the West.

To get an idea of Phelps’ shift, compare what the Nobel Committee awarded him the prize for:

“In particular, Phelps introduced an expectations-augmented Phillips curve:

“π = f(u) + πe

“where π is the actual rate of inflation, πe is the expected rate of inflation and f(.)  a decreasing function of unemployment, u. According to the equation, actual inflation depends on both unemployment and the expected rate of inflation.”

Mathematics, in other words. Here is how he sounds in the book’s opening:

“A person’s flourishing comes from the experience of the new: new situations, new problems, new insights, and new ideas to develop and share.”

Which sounds more like a self-help book.

This reviewer very much prefers the latter iteration. The arithmetic tautologies of mainstream economic theory are, well, tautologies. But Phelps’ attempts to be more of an economic historian and social theorist are not especially convincing.

He does pose a useful question, though. Why did Western economies make such advances in the 18th and 19th centuries when they had changed little in the previous centuries? He discounts the common explanation, that it was a spate of inventions (in so doing dismissing Hayek’s analysis). This is a sound move.

He then goes looking for various other factors, such as the rise of the joint stock corporation, the way “modern capitalism introduced innovation into capitalism”, various forms of production innovations, greater freedom of exchange, the legal right to accumulate the income from the sale of a product, greater diversity in the financial markets and favourable political institutions. He rightly excludes property rights, which have been in existence for 3,000 years.

It is a long list and hard to argue with. What is noticeable, however, is what is missing. Large stockmarkets. One of the poorly told stories of modern capitalism is the emergence in the north of England, in the mid-19th century, of mutual funds, savings vehicles which pooled money that was put into equity structures. They were often religious non-conformists who found it the best method of capital formation. Not long after, Australian health funds were doing the same.

The eventual result of this was that stockmarkets in England and later America became proportionately much larger than those on the Continent. With the exception of Japan – a decidedly odd exception – stockmarkets remain mainly an English-speaking phenomenon. They are still comparatively small in European and Asian countries (China is another exception, but most of the companies are majority government owned.)

When it comes to encouraging innovation, stockmarkets are clearly superior. The investor takes all the risk; there is not the constant requirement to meet the interest costs on a loan or bonds. That gives the innovator more time and freedom. The superior financial results that accrue when this happens have been evident for about a century. It is one reason why the American economy grew so dominant.

Phelps seems intent on proving himself to be a Renaissance Man, an economic humanist. He weaves such diverse thinkers as Aristotle, Montaigne, Nietzsche, Rawls, Shake­speare, Cellini, Ibsen, Cervantes, Keats, William James and Bergson into an entirely unconvincing narrative.

Don Quixote, for example, is “overcoming the barren economy of the Spanish desert” and Hamlet, it is implied, exhibits the individualism that is required for innovation.

At least he does not exhibit the extraordinary ignorance of the economics fraternity of other schools of thought, especially philosophy, so one should not complain. But I will anyway. It is a fine thing that Phelps has read these things (assuming he has) but he should not be parading it. Nor should he be trying to integrate it into an intellectual framework that is as superficial as it is wrong. Fortunately, his critique of economists such as Hayek and Schumpeter is more insightful.

Phelps has asked many right questions in this book, and has set out to answer them in the right way. What is it in human individuals and societies that lead to economic flourishing? What can we learn from the past about what works best in sparking effective innovation?

Most importantly, he uses the methods of the humanities rather than the sciences. He asks what was new when there were big advances, not what is always the same. It is a pity that more economists do not do that, rather than pursuing their quasi-scientific idiocies.


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