Economics, Social Justice

Edmund Phelps, Mass Flourishing, and Bleeding Heart Libertarianism

k10058Thanks so much to the BHL crew for allowing me to stop by for a visit. I wanted to share some thoughts about Mass Flourishing, the new book out by the economist Edmund Phelps. Here is a summary by the author.

Phelps is best known in the economics profession for his work in macroeconomics, particularly his development (along with Milton Friedman) of the concept of the natural rate of unemployment in the 1960s. It was in recognition of that work that he was awarded the Nobel Prize in 2006.

In more recent decades, though, Phelps has turned his attention to broader subjects that should be of special interest to BHL readers. In the 1990s he focused on the problem of declining incentives to work among low-skill workers and the resulting blights of long-term joblessness, social exclusion, and intergenerational poverty. Addressing the problem head-on, Phelps has championed a system of graduated wage subsidies to encourage greater labor market participation and raise incomes at the low end of the socioeconomic scale. Over the past decade, his central preoccupation has been economic dynamism – the “creative destruction” unleashed by entrepreneurial innovation. In particular, he has explored the contrast between what he sees as the relative dynamism of American-style capitalism and the relative sclerosis of continental European “corporatism”.

To an extent perhaps unmatched by any contemporary economist, Phelps thus embodies the distinctive BHL concern with both “free markets and social justice.” Indeed, the BHL intellectual project has sometimes been described as the effort to bring together the best of Hayek and Rawls. And for his part, Phelps regularly acknowledges his debt to both thinkers and weaves their insights into his own analysis.

Those debts are in clear evidence in Mass Flourishing. The book is wide-ranging and highly eclectic: in just two pages (pp. 280-281) you’ll find references to Cervantes, Shakespeare, Hume, Voltaire, Jefferson, Keats, William Earnest Henley, William James, Walt Whitman, Abraham Maslow, Rawls, Nietzsche, and Lady Gaga! Its main ambitions, though, are twofold. First, to argue that the “modern economy” – i.e., one characterized by a high degree of entrepreneurial innovation – succeeds better than any rival social system yet devised in promoting both individual flourishing and social justice. And second, to construct a historical narrative in which the “modern economy” experienced its heyday in the late 19th and early 20th centuries but has been in general retreat since the 1960s, giving way to “corporatism” and the recrudescence of “traditional” values.

In this post I’ll focus on Phelps’ first argument. As to the historical narrative, I’ll just say for now that I’m unpersuaded – although Phelps does put forward lines of evidence that have me reassessing some of my priors. I hope before long to address that part of the book in a different forum – so stay tuned.

Phelps’ argument for dynamism turns away from purely material concerns and puts central emphasis instead on the psychic benefits of modern economic life. Or, to put the matter another way, Phelps argues that the modern economy bestows its greatest benefits on us, not as consumers, but as producers and workers.

Specifically, Phelps adopts a conception of human flourishing rooted in Aristotle by way of Dewey, Maslow, and Rawls: flourishing consists of self-realization – in other words, the development of talents and capacities – through solving problems and meeting and overcoming challenges. The signal virtue of the dynamic modern economy, in Phelps’ view, is the way in which its relentless creative destruction turns creative problem-solving into a mass pursuit – and thus transforms the world of work into the most accessible arena for self-realization ever devised.

“The distinctive experiences of the modern economy,” Phelps writes, “come from its distinctive activity of creating, developing, marketing, and testing new ideas. In many occupations, though not all, the experience of work is transformed from the sameness, or stasis, typical in the traditional economies to the change, challenge, and originality found in the modern economy.” (p. 57)

Phelps notes the fundamental similarity between entrepreneurial innovation and artistic and intellectual creativity. Indeed, he argues that they spring from the same cultural source: the distinctive ethos of self-discovery and personal development that first began to take shape in 15th-century western Europe and that Phelps labels “modernism” or “vitalism.” Here’s Phelps on the interaction between economic and cultural dynamism:

The earliest expressions of the modern, very clearly in music and philosophy, appear to anticipate and perhaps to kindle the spirit without which modern economies would have been impossible; these precocious breakthroughs in the arts and philosophy are harbingers of the modern economies to come. Nevertheless, the extraordinary waves of artistic innovation in the 19th century and the first half of the 20th are reflections and commentary on the new dimensions of life wrought by the modern economy. (pp. 75-76)

Of course the great irony is that the emergence of the modern capitalist economy in the 19th century was greeted with overwhelming hostility from artists and intellectuals, who saw in bourgeois “philistinism” the very antithesis of their own sensibility. Some of the blame for this misunderstanding, as Phelps duly notes, lies with the materialistic focus of economists, who generally have regarded all work as disutility and production as a cost whose only justification is consumption. That theoretical apparatus delivers real and important insights: one of the great advantages of the economic way of thinking is to see through the “lump of labor” fallacy according to which people need to consume in order to give workers something to do. But it also tends to obscure the psychic benefits of capitalism.

It’s hardly surprising that I deeply sympathize with Phelps’ efforts to highlight those psychic benefits. After all, I wrote one book about how capitalist mass affluence has triggered a mass quest for self-realization, and another one about how the increasing complexity of modern economic life spurs the development of our cognitive capabilities. And here is a much earlier article of mine that makes a very similar argument to the one Phelps advances.

I would caution, though, not to go too far in ascribing the rise of mass flourishing to the specific variant of highly innovative capitalism that Phelps and I happen to favor. As Phelps observes, economies can grow rich and highly advanced without much in the way of homegrown innovation – they need only succeed in adopting innovations pioneered abroad. And, as I read the evidence, any rich complex economy – even one in which entrepreneurial creative destruction is fairly feeble – will afford wide opportunities for personal growth through engaging and challenging work.

That said, I’m certainly inclined to believe that greater exposure to competition, which is what primarily distinguishes a more entrepreneurial capitalism from its corporatist cousins, also invigorates the workplace in ways that conduce to individual flourishing. As the economist J. R. Hicks once noted, “The best of all monopoly profits is a quiet life.” However seemingly desirable, the peace and quiet made possible by the absence or muting of competitive pressures weaken the connection between effort and reward – and thus the motivation to stretch one’s capacities. Just anecdotally, think of the workers you’ve encountered at the post office or your cable company: not a lot of passionate striving for excellence in evidence. More seriously, Phelps cites research he conducted with Icelandic economist Gylfi Zoega which finds that job satisfaction is positively correlated with more dynamic economic institutions. (On the other hand, it should be noted that other research shows higher job satisfaction in state-owned enterprises than in privately owned firms.)

Phelps argues that a dynamic capitalist economy is a good economy because it most effectively promotes the good life for its members. In addition, Phelps adopts a Rawlsian analytical framework to contend that a dynamic capitalist economy is also a just economy. (Interesting side note: Phelps’ intellectual debt to Rawls began with a personal relationship, as the two shared adjoining offices at the Center for Advanced Study in the Behavioral Sciences at Stanford in 1969-70 while Rawls was completing A Theory of Justice. They remained friendly over the years that followed.)

The social model that Phelps seeks to justify is a species of BHL “market democracy” or “neoclassical liberalism”: it combines a lightly regulated, highly dynamic market order with a state-provided social safety net (the centerpiece of which is a system of graduated wage subsidies designed to reduce unemployment and lift wages for the least advantaged workers). The inevitable economic inequalities that will arise under such a social model are consistent with the Rawlsian difference principle as Phelps understands it: the higher growth made possible by dynamism maximizes living standards at the bottom, both directly through higher market incomes and lower costs of living and indirectly through supplying the tax revenues that fund wage subsidies.

But Phelps goes beyond a consideration of merely pecuniary rewards and applies the difference principle to the more broadly conceived well-being of self-realization and flourishing:

The present book, after comparing the main alternatives, sees reasons to believe that a modern economy … is tailor-made to produce the flourishing and personal growth that are at the core of the good life…. With that evidence in hand, a member of a thoroughly modern society, placed in Rawls’ original position and assuming that he might be among the least advantaged, would have good reason to decide that the modern-capitalist economy, if justly-functioning and well-functioning, was the right choice to make. (p. 301)

Phelps recognizes that there are other conceptions of the good life besides his own, and thus that a life of creativity and active development of talents is not for everybody. People should be free to pursue other paths, he argues, but the path of dynamism must not be blocked as a consequence:

Justice requires tolerance of other lifestyles and thinking, but it does not require those who would pursue the good life to engage in self-denial or to surrender to those styles. Justice does not allow the traditions of the others to so constrict the modern economy as to block the expression of its dynamism in innovative activity and thus modern life. (p. 305)

It’s impossible to capture all the twists and turns in Phelps’ argument here, but I hope I’ve succeeded in conveying at least the basic thrust of his thinking. For those previously unaware of his work, I encourage you to dive in and explore. Anyone interested in the synthesis of free markets and social justice will find this eminent thinker’s distinctive version of that synthesis both illuminating and thought-provoking.

  • SimpleMachine88

    It isn’t praise of peaceful competition (the free market) for its peacefulness, which it sounds like he is making, and which has been said before.

    Go into the Exchange in London, that place more venerable than many a court, and you will see representatives of all the nations assembled there for the profit of mankind. There the Jew, the Mahometan, and the Christian deal with one another as if they were of the same religion, and reserve the name of infidel for those who go bankrupt

    It’s the humanistic case for competition. And it’s true.

    You know what the fellow said – in Italy, for thirty years under the Borgias, they had warfare, terror, murder and bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, they had brotherly love, they had five hundred years of democracy and peace – and what did that produce? The cuckoo clock. So long Holly.

    I suppose the virtue of the market is that it has the virtues of both. Harmony and Discord.

    • Damien S.

      In the reality beyond 1949 noir movies, Switzerland also gave us the Bernoullis, Euler, comparative linguistics (Saussure, Wackrnagel, Jud), Louis Aggasiz, Rousseau, absinthe… Apparently stronger in science and mathematics than in grand works of art.

      • SimpleMachine88

        Is “Switzerland” a Showtime series?

      • adrianratnapala

        Add Einstein.

        • Damien S.

          Hah! And Pauli, and Piaget, and Wirth, and Werner, and Dirac…
          Some of these are fuzzy: born elsewhere but living in Switzerland for a long time, or born there but working largely outside the country. Others are undeniably Swiss, like Piaget, or Paul Müller who discovered DDT. Discovery of DNA, development of aseptic surgery, restriction enzymes, LSD… 21 Nobel Prizes in physics, chemistry, or medicine, 6% of the awarded prizes, with 8 million people today. Pretty good.

          • And now they have Tina Turner too …

          • SimpleMachine88

            Lordee! the point wasn’t about the virtues of mountainous democracies or Orson Welles’ quality as a historian. By the way, what has to be subtracted from the Switzerland column is the cuckoo clock, which they did not invent, and peacefulness.

            Obviously all these accomplishments simply show the quality of vicious mercenary pike-men whose mathematical and artistic talent probably is related to their excellence at stabbing people who mess with the Pope.

            The point is that competition drives people to achieve. America makes Rockefellers like Hellenic warfare makes Hectors. And nobody gets shot in the foot.

          • adrianratnapala

            Dirac was born and bred in Bristol.

  • Badger

    I think focussing on human flourishing is the right framework for thinking about how society should be organised. Certainly it is to be preferred over “justice” or “fairness” that are impossible to justify given people’s diverging and often irresolvable intuitions and feelings about those concepts. However, it is surprising to me that someone should even try to defend capitalism today with an appeal to human flourishing because our experience is that it is less and less effective at that. There is of course no surprise here since capitalism is about efficiency on the back of well-aligned incentives, whereas human flourishing is not (though it may benefit from it at times).

    It could also be argued that the success of capitalism in improving human flourishing is because it is very good at the low hanging fruit. When people cannot meet basic needs, their intuitions about what will lead to flourishing are very good. Food, a roof over their head etc.. But we have seen that once those basic needs are met, people are incentivised to be very wasteful in terms of human flourishing. They fill their too large houses with too much stuff. They work longer hours rather than spending time cultivating relationships. They do jobs that pay well rather than jobs that would be more likely to lead to self-actualisation or that would bring meaning and happiness to their lives.

    We have the perverse situation now in which we are productive enough that everyone could have the conditions for flourishing but they do not. And capitalism all but makes this state of affairs inevitable because where it once aligned incentives well, it now skews them towards the wrong things. It confuses what we desire with what will help us flourish, and it creates an environment and culture that does not help us towards flourishing either.

    Is capitalism better than communism? Certainly. Is it the best possible system we can come up with? That has to be doubted. We have put people on the moon, cloned sheep, invented all manner of extraordinary things and staggering complexity. Capitalism – even with a safety net – is a crude tool to achieve human flourishing and Phelps lacks imagination if he thinks this is the best option we have.

    • Les Kyle Nearhood

      I do not buy the low hanging fruit argument. If there is any slowdown in the capacity of the free market to satisfy needs, it is wise to look at what forces are conspiring to make it less free.
      . Capitalism as you call it, (which can mean a lot of different things) may not be the best thing imaginable, but it is the best which has demonstrated it’s capacity to encourage growth, wealth, and opportunity.

      • Damien S.

        Or it’d be wise to see if the barriers to flourishing are now in areas that markets are poor at addressing. Pollution and climate change and environmental degradation, for example. Or insufficient basic research.

      • Badger

        I’m curious what you think it is about the free market that gives it any interest in satisfying basic needs. There are an increasing number of people that are unable to do anything the market would be willing to pay for. As robotics and AI improve, that number of people will steadily grow. If the market value of people’s labour is well below that needed to satisfy basic needs, there is simply no mechanism for basic needs to be met.

        Furthermore, meeting basic needs is not the same as flourishing. There are a whole raft of ways in which organising a society in order to maximise efficiency is disconnected from organising a society to maximise flourishing.

        We can see this in the fact that all Western countries redistribute wealth away from market outcomes somewhere between 25% and 50% of GDP (with the US at 25% and Denmark at 50%).

        The problem we now face is that market outcomes, even somewhat adjusted to make them more acceptable to the worst off, have lead to no increase in income for the median earner in 30 years. All the benefits from the extra work and technological progress are going to the people at the top. As Tyler Cowen notes, this trend is accelerating and vanilla capitalism has no answer.