Modernism vs. Corporatism

Phelps points out that economic progress (the mass flourishing of his title) depends on dynamism, which means the sort of creative destruction described by Joseph Schumpeter. Phelps writes,

A modern economy, as that term is used here, means not a present-day economy but rather an economy with a considerable degree of dynamism—that is, the will and the capacity and the aspiration to innovate. (Phelps, page 19)

Phelps believes that such a dynamic economy requires cultural support. He writes,

Modernist beliefs include some distinctive ideas of what is right: the rightness of having to compete with others for positions of higher responsibility, the rightness of greater pay for greater productivity or greater responsibility, the rightness of orders from those in responsible positions and the rightness of holding them accountable, the right of people to offer new ideas, and the right of people to offer new ways of doing things and to offer new things to do. All this stands in contrast to traditionalism with its notions of service, obligation, family, and social harmony. (page 99)

However, modernism generated a backlash. One form that the backlash took was socialism. However, socialism never acquired the popular support of another form of backlash, called corporatism. Phelps writes,

One of the corporatist criticisms of the modern economy was that it had no leadership… The desire for direction (for dirigisme, as the French said) was a major strand of corporatist thought.

Many corporatists saw the uncoordination in capitalism as another source of disorder. They sought a system of concerted action. At the micro level, a company’s owners could act on a proposal only if “stakeholders,” such as employees, agreed (codetermination or mit Spreche). At the macro level, legislative action needed the consent of the main players, capital and labor (Concertazione). (page 138)

Corporatism satisfies a desire for security. People want security of consumption, security of jobs, and security of their economic status. Corporatism replaces the decentralized competition of the market with political control over the economy. The forms of protection people obtain include occupational license restrictions, labor unions, and entitlement programs. As Phelps puts it,

The corporatism of 1920s Europe held out the promise of some defense against the relentless innovations of the modern economy and against the desertion of consumers—defense that they later dubbed “social protection.” Farmers could go on producing, even if not all of their produce could be sold in the marketplace. Movie makers could be subsidized even if their former audiences now preferred not to watch them. (page 140)

The corporatist economy is highly organized. Phelps writes,

The economy was to be organized into groups of companies and workers, large and small. The impression was that workers and indeed all groups, from taxi drivers to pharmacists, suffered from competition—from others and each other. (page 142)

In the United States, the Great Depression provided an impetus toward corporatist solutions. However, there was a strong cultural and judicial resistance to the sort of cartels proposed by the National Recovery Administration. Phelps writes,

One may view Franklin Roosevelt as having made accommodations to corporatism that served to preserve modern capitalism from wholesale replacement by corporatism. It is arguable that corporatism began to make deep inroads that threatened to kill modern capitalism only long after Roosevelt was gone. (page 154)

Indeed, a big turn toward corporatism in the United States began in the 1970s, under President Nixon. His Administration introduced wage and price controls. It also increased the generosity of Social Security.

Phelps sees corporatism at work in the housing policies of Presidents Clinton and Bush and in the regulatory policies of President Obama. He writes,

The corporatist influence in the decade past must be judged to have increased. The Federal Register of Regulations has continued to rise steeply… The U.S. tax code runs to 16,000 pages. In contrast, the French have a tax code with only 1,900 pages. (pages 164-165)

Phelps disparages the current state of affairs:

A panoply of new roles has been given to the state. The state may compensate those hit domestically by a range of developments, from foreign competition to storm damage. Government grants of unlimited scope may be made to regions and cities, even if their latent function (in Robert Merton’s term) is to dispense patronage in return for support, political or financial. Lobbyists are welcome to submit requests for legislation, regulations, and interpretive rulings, especially if they come with bribes. Regulations of industries are instituted, aimed at shielding companies or workforces from competition. Bans spare influential communities from new airports, landfills, and the rest. Shakedowns of companies by communities, nonprofits, or governments extract donations or other accommodations… The result was not necessarily an extremely large government, but it was in important ways unlimited government. (page 167)

Phelps sees the financial sector as rife with corporatism. He writes,

Recently, a congressional-banking complex has developed far beyond what existed before… banks and political interests have entered into new arrangements for their mutual benefit… banks have been exempted from equity requirements for their holding of U.S. sovereign debt. (page 251)

The reduction in economic dynamism adversely affects low-skilled workers. Phelps writes,

… there was a widening gap between the lower reaches of the labor force and the middle strata of the labor force in terms of wages—the magnitude of which is captured by the 10-50 ratio: the size of the wage earned by workers found 10 percent of the way up the distribution as a ratio to the wage of workers found 50 percent of the way up… Low-wage men in fulltime jobs fell farther behind the median earners by 9 percent in the 1970s and by another 10 percent in the 1980s. They lost ground at about the same rate in the early 1990s and stabilized in 1995. As a result, the relative wage of low-wage men by the mid-1990s was about 20 percent below its 1975 level. (page 227)

Unfortunately, policy makers are responding to this increased inequality by doubling down on corporatism, not dynamism.

The efforts to address inequality were mainly directed not at raising earnings and thus stirring people to help themselves by continuing to work… They were directed at providing economic support to low-income persons whether or not they were employed. The modest flow of income from the EITC was a drop in the bucket next to the sums a low-income person was provided in food stamps, Medicaid, low-income housing projects, aid to mothers of dependent children, disability benefits… a massive flow of income compared to the wage that they could earn. (page 229)

Where does this leave us? According to Phelps, we face economic stagnation.

… there is much rot in the once-modern institutions. Short-termism is rife in business and finance—not just governments… CEOs have no long-term interest in their companies and mutual funds have only a short-term interest in holding the shares. The result is that virtually all innovation can only come from outsiders—start-ups and angel investors… In the public sector, corporatism has spread from Europe to America and metastasized into clientilism, cronyism, and pandering—graft is the least of it. Corporatism has also brought an explosion of regulations, grants, loans, guarantees, taxes, deductions, carve-outs, and patent extensions intended mainly to serve vested interests, political clients, and cronies… The corporatist government’s contacts with political supporters and lobbyists shrink the size of the market left to innovators. In the past decade, large banks, large companies, and large government formed a nexus to pump up home mortgage debt in America and to create unchecked sovereign debt and unfunded entitlements in several nations in Europe. So America has joined Europe in having a parallel economy that draws its nourishment from the ideas of political elites, whatever their motives, rather than from new commercial ideas. (page 314)

He continues,

In a few nations, the modern notions prevailed over absolutism, determinism, antimaterialism, scientism, elitism, and the primacy of the family. These fortunate few supported modern-capitalist economies in the 19th century until their decline in the 20th. This too has changed.

Now, the balance between modern and traditional values appears on the whole to have swung back significantly. There may have been no loss in the intensity with which modern values are held nor in the prevalence of those holding them… However, survey data record a strong increase of traditional values. These include family values and community values, of course, and some age-old ethical dogma: advance in lockstep, take no action (like competing) that would harm others, and the right to be compensated for every reversal at the hand of the market or the state. (page 315)

In his conclusion, Phelps offers few convincing remedies. The problem is that the public now seems to prefer corporatism to dynamism. Phelps writes,

Nations will have to push back against the resurgence of traditional values that have been so suffocating in recent decades and revive the modern values that stirred people to go boldly forth toward lives of richness. (page 324)

Phelps has given us a clear warning of the dangers of corporatism. I hope that more people hear and heed the warning.