Nobel Prize Winner Phelps on “Dynamic Capitalism”

Edmund Phelps writes in the opinion Journal on “Dynamic Capitalism:

There are two economic systems in
the West. Several nations–including the U.S., Canada and the
U.K.–have a private-ownership system marked by great openness to the
implementation of new commercial ideas coming from entrepreneurs, and
by a pluralism of views among the financiers who select the ideas to
nurture by providing the capital and incentives necessary for their

The other system–in Western
Continental Europe–though also based on private ownership, has been
modified by the introduction of institutions aimed at protecting the
interests of “stakeholders” and “social partners.”

Let me use the word “dynamism” to
mean the fertility of the economy in coming up with innovative ideas
believed to be technologically feasible and profitable–in short, the
economy’s talent at commercially successful innovating. In this
terminology, the free enterprise system is structured in such a way
that it facilitates and stimulates dynamism while the Continental
system impedes and discourages it.

When building the massive
structures of corporatism in interwar Italy, theoreticians explained
that their new system would be more dynamic than capitalism–maybe not
more fertile in little ideas, such as might come to petit-bourgeois
entrepreneurs, but certainly in big ideas.

Friedrich Hayek, in the late 1930s and early ’40s, began the modern theory of how a capitalist
system, if pure enough, would possess the greatest dynamism–not
socialism and not corporatism. 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. Where the Continental system convenes experts to
set a product standard before any version is launched, capitalism gives
market access to all versions.

Globalization has diminished the importance of scale as well as distance.

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.

Dynamism does have its downside.
The same capitalist dynamism that adds to the desirability of jobs also
adds to their precariousness. The strong possibility of a general slump
can cause anxiety.

Why, then, if the “downside” is so
exaggerated, is capitalism so reviled in Western Continental Europe? It
may be that elements of capitalism are seen by some in Europe as
morally wrong in the same way that birth control or nuclear power or
sweatshops are seen by some as simply wrong in spite of the
consequences of barring them. And it appears that the recent street
protesters associate business with established wealth; in their
minds, giving greater latitude to businesses would increase the
privileges of old wealth. By an “entrepreneur” they appear to mean a
rich owner of a bank or factory, while for Schumpeter and Knight it
meant a newcomer, a parvenu who is an outsider. A tremendous
confusion is created by associating “capitalism” with entrenched wealth
and power. The textbook capitalism of Schumpeter and Hayek means
opening up the economy to new industries, opening industries to
start-up companies, and opening existing companies to new owners and
new managers. It is inseparable from an adequate degree of competition.
Monopolies like Microsoft are a deviation from the model.

I have been meaning to write an article on this, but I am backed up with stuff. So I am trying to clear my backlog (tossing stuff, or doing short posts for future reference).

Here are some thoughts:

  • “good” globalization (based on dynamic capitalism) vs “bad” or so-so globalization (based on stake-holder capitalism). What does this mean for PNM theory which relies partially on unfettered support for globalization to shrink the gap?
  • Entrepreneurial Capitalism = Dynamic Capitalism. “Good Globalization” = Entrepreneurial Peace Theory?
  • Reference Postal’s The Dynamist blog and book
  • Bobitt’s successor state forms need more work. His “market-state” is a post-nationalism dynamic-capitalism state. Another competing form could be the stakeholder-state (post-nationalism, stakeholder-capitalism). The other forms are…[heh for long simmering post.]


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