Phelps on the Future of Capitalism
By Arnold Kling
Nobel Laureate Edmund Phelps writes a long interesting article. Excerpts and my comments below the fold.
Note that a new commercial idea in a country may be an application of an invention or discovery made by scientists outside the economy or an innovation made by a business in another economy. That was Josef Schumpeter’s early view of how commercial ideas came to a country. Or the new idea might come from within the nation’s economy: an original idea inspired by the observations and imagination of producers, employees, managers or consumers – people “on the spot.” This was the view of Friedrich Hayek and of most experts today. If innovation were mere Schumpeterian application or imitation, a socialist system could approximate the results of a capitalist system.
I was not aware of that contrast between Hayek and Schumpeter. Maybe I should have read more of their original work, instead of waiting for Phelps to distill it for me.
He says later,
One has to conclude that “generation of wealth” is not special to capitalism. Corporatist economies are quite good at that.
…As for freedom…some of the relatively socialist and corporatist economies of western Europe appear to be pretty tolerant of deviance from the mainstream.
Good news, since we seem to be making a sharp turn in the corporatist direction. However, he goes on to say,
My research using survey data supports the widespread impression that, in the relatively capitalist economies, people in ordinary jobs have freedoms that they value – more so than workers in the relatively socialist or corporatist economies. In the former economies more than in the latter, workers say they want jobs offering chances to take initiative and responsibility (which reveals that they know that such jobs are available), while acknowledging also the value of teamwork – thus the need both to give and take orders. Relatedly, earning one’s way in the impersonal world of business – supporting oneself – is, for most people, necessary for what John Rawls called self-respect.
Key question: do we think that the connection between making a living and self-respect is strongly ingrained, or might it go away?
Phelps wants to maintain our dynamism while doing something about the sort of speculative swings that we recently experienced.
There are ways of fortifying the financial sector against the speculative fever of investors and entrepreneurs in the business sector without obstructing the speculative investment waves that are emblematic of a healthy capitalism. One suggestion,which comes from my colleague Richard Robb, calls for a small tax on the short-term indebtedeness of financial companies such as banks. So much of the banks’ problems arose from excessive short-term borrowing of little or no social utility. Let us tax that in order to force banks to finance their lending with long-term borrowing instead…A suggestion from my long-time collaborator Roman Frydman calls for the introduction of a band around the index of housing prices, a band around the main index of stock market prices, and so forth. When the index rises or falls outside the band, the government will increase margin requirements, short-selling requirements, and various other costs so as to dampen – but not outlaw – speculation on a further move of the asset price index.
Phelps’ own ideas include wage subsidies for low-wage workers and the chartering of banks that would only make loans to the business sector (as opposed to housing). I would note that wage subsidies could take the form of progressivity in the employer portion of the payroll tax. That is, employers would pay a lower payroll tax for low-wage workers.