In his recent book entitled Mass Flourishing Edmund Phelps attempts to account for the innovation and dynamism which he sees as having characterized the modern economy from the beginning of the 19th century until the latter part of the 20th. In describing an economy as modern, Phelps does not just have in mind the present day, or the period following some more recent event in history such as the French or American Revolution, but rather one marked by innovation and dynamism, such as the American economy for the past century or so. While the economy of Britain, and Germany somewhat belatedly, have also exhibited such modernity, many other countries, e.g., Japan or Spain, are only modern in the sense that they have managed to imitate more dynamic ones (Phelps 2013, 109-110).
Phelps defines dynamism as “the willingness and capacity to innovate” where an innovation is “a new method or new product that becomes a new practice somewhere in the world (Phelps 2013, 20).” It is the latter feature which distinguishes modern capitalism from the mercantile variants which preceded it; as he puts it: “Entrepreneurs soon put merchants in the shade [Phelps 2013, 26].” Not that Phelps was the first to celebrate the economic dynamism of the modern economies. Marx and Engels put it in even more vivid terms: “The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all the preceding generations together. Subjection of Nature’s forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalisation of rivers, whole populations conjured out of the ground—what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour (Marx & Engels 1848, 48)?”
Lest these words lead you to believe that you may have had the wrong idea about the Manifesto all along, let me reassure you that its authors had not come to praise capitalism, but to bury it. As Mises clearly reminds us in the Introduction to Human Action, one of the great problems of the age is that people have in fact subscribed to the Marxist myth that improvements in production had nothing at all to do with capitalism. Further, on this account, capitalism was only the smoke-screen, or in their parlance, the ideological superstructure, put up to conceal capitalist exploitation, and as such could be cast aside with no loss to the economy (Mises 1998, 9).
Phelps for his part has no doubt that the economies he classifies as modern, which have brought enormous material prosperity in their wake, are indeed “specimens of modern capitalism,” as opposed to the mercantile variety where those few people with access to capital might become successful merchants. Although Phelps shares Mises’s view that the connection between capitalism and a dynamic modern economy is no accident, it is left to a footnote to make that clear (Phelps 2013, 35).
To the extent that modern capitalists such as Henry Ford became very wealthy themselves, it was, as DiLorenzo writes, because they provided people the world over with products they wanted to buy (DiLorenzo 2004, 11-12). Indeed, Phelps contends that Henry Ford’s pursuit of the mass-produced car is “a paradigm case of innovation.” While this sounds like a straightforward enough claim, it is not entirely clear what constituted Ford’s eureka moment, which Phelps seems to think genuine innovations typically involve. Morris, for example, points to the inspiration Ford claimed to have got from the slaughterhouse “disassembly line” for the sort of Model-T plant capable of producing enough cars to meet the expected demand (Morris 2012, 205). However, Phelps seems inclined to the view that Ford’s innovation was more a matter of ideology than engineering, namely “the egalitarian idea that everyone should have a car (Phelps 2013, 32-33).”
Of course somewhat similar sentiments had been expressed by Mises over 70 years ago: “The characteristic feature of modern capitalism is mass production of goods destined for consumption by the masses. The result is a tendency towards a continuous improvement in the average standard of living, a progressing enrichment of the many. Capitalism deproletarianizes the “common man” and elevates him to the rank of a “bourgeois” (Mises 1952, 1).
Not that this feature had escaped Marx and Engels either: “The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilization. The cheap prices of its commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians’ intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilisation into their midst, i.e., to become bourgeois themselves. In one word it creates a world after its own image (Marx and Engels 1848, 47).”
In fact Deirdre McCloskey has written that capitalism is pretty much synonymous with innovation, and of the two terms, she prefers the latter, as being a more satisfactory way of describing “what was born in Europe in early modern times, enriching the world in the nineteenth and twentieth centuries beyond all expectation” (McCloskey 2010, 76). Part of the reason that innovation was a better way of accounting for what Phelps calls “the modern economy” is that there is nothing terribly new in capitalism in the sense of a market economy, which had been around for a very long time. But as McCloskey again writes: “What was different after 1800, and with unstoppable force after 1900, was a novel and immense and sustained, almost lunatic, regime of innovation, finally breaking the Malthusian curse. As people enriched, they eventually started having fewer rather than more children, quite against Malthusian expectations—though even with large families, such as in bourgeois England, the enrichment would have taken place, so unprecedentedly powerful was it (McCloskey 2010, 19).”
Although, as David Gordon reminds us, Phelps’s Austrian enthusiasms are under fairly tight control (Gordon 1999, 1), he does give favorable mention to the two most notable economists in that tradition, namely Hayek and Mises. In Hayek’s case, for example, while Phelps acknowledges the significance of Hayek’s knowledge economy which is dependent upon local and very specific knowledge on the part of market actors, Phelps argues that such a notion is of little use in explaining innovation, which on his view constitutes an imaginative leap beyond our current knowledge. However, I think it clear that Hayek was not just aware of the incremental nature of improvements but also of the uncertain and risky path leading to innovation. Indeed, as he writes:” All we can do is increase the chance that some special constellation of individual endowment and circumstance will result in the shaping of some new tool or the improvement of an old one, and to improve the prospect that such innovations will become rapidly known to those who can take advantage of them (Hayek 1960, 30).”
In Part 2 of Mass Flourishing Phelps turns his attention to those parts of the old world in particular which did not rush headlong into the modern economy in the way that America and Britain mostly did, but maintained a more traditional society, based on the sorts of views Mises believed to have been largely consigned to the dustbin of history by the classical economists, namely: “that it is unjust and unfair to outdo a competitor by producing better and cheaper goods; that it is iniquitous to deviate from the traditional methods of production; that machines are an evil because they bring about unemployment; that it is one of the tasks of civil government to prevent efficient businessmen from getting rich and to protect the less efficient against the competition of the more efficient; that to restrict the freedom of entrepreneurs by government compulsion or by coercion on the part of other social powers is an appropriate means to promote a nation’s well-being ( Mises 1998, 8-9).”
Those parts of Europe which were slower to adapt to the modern economy proved fertile grounds for views which arose in opposition to liberalism in its classical sense. Phelps discusses two such ideologies in the historical order in which they arose, namely socialism and corporatism. If he devotes less attention to socialism, it is, as he points out, largely due to the work of Mises and Hayek. Mises contended that in the absence of market prices a socialist state would be unable to cost, e.g. the construction of a project such as a railroad, and therefore had no way of deciding, what needed to be built if anything (Mises 1990, 28).
Mises goes on to make a related point that it will be hard to incentivize effort in a socialist economy, since as he puts it: “the exclusion of free initiative and individual responsibility, on which the successes of private enterprise depend, constitutes the most serious menace to socialist economic organization” (Mises 1990, 33). Phelps agrees that subsequent Soviet history with its low workforce morale and rampant alcoholism only served to underscore Mises’s arguments, which Phelps further illustrates with an anecdote about the Soviet-era brick delivery driver who manages to lose as much of his load on the way as he eventually delivers. No wonder even a latter day socialist such as G.A. Cohen, who asks us to consider socialism as an extended camping trip, has trouble squaring this analogy with the actual history of the Soviet Union, or of “similarly ordered states” (Cohen 2009, 75-76). Thus, Phelps acknowledges that Mises was “the originator of the property rights theory” (Phelps 2013, 123), a point on which Mises himself was quite clear: “The program of liberalism, therefore, if condensed into a single word, would have to read: property, that is, private ownership of the means of production” (Mises 1985, 19).
Although Phelps feels that both Mises and Hayek might have sharpened their attack on socialism to make it clear that it would not only lack efficiency but also innovation, as we have shown, at least in Hayek’s case, it was not for any lack of interest in innovation per se. In Mises’s case, he saw that innovation was at the heart of capitalism from the very beginning, where the poor and humble set about bootstrapping their way out of desperation by small scale manufacturing: “This was an innovation. These innovators did not produce expensive goods suitable only for the upper classes; they produced cheaper products for everyone’s needs, eventually leading to the mass production so typical of capitalist industry” (Mises 1979, 3). On the other hand, not only does Phelps admit that there was little prospect of convincing socialists in formerly Czarist Russia that dynamism could only be bought at the cost of a return to private property but also that, as he puts it: ” Most economists, including many on the left, came to declare the Austrian team the winner of the debate. The Austrian school persuaded the economics profession that a socialist economy would cause a decisive deterioration of efficiency (Phelps 2013, 129).
Having dealt with one of the main alternatives to the modern capitalist economy in relatively short order, thanks no doubt to the aforementioned distinguished Austrians, Phelps now turns his attention to a more influential movement, corporatism, which has often styled itself as the 3rd way, neither capitalism nor socialism. He argues that what became known as corporatism differed from modernity by wishing to maintain the sort of traditional protectionism which Mises claimed had been swept away by the economists. In response to what the traditionalists saw as the somewhat disorderly market order, they offered dirigisme, synonymous no doubt for Mises with etatisme. The main purpose of corporatism, as Phelps sees it, was for the state to keep a lid on the private sector, stopping short of the socialists’ abolition of private property and inequality (Phelps 2013, 141).
Italy under Mussolini gave a definite shape to corporatism, inspired no doubt by earlier Catholic versions of that doctrine, with different industries constituting a corporation with their respective employer’s group and union. Germany had moved in a corporatist direction since Bismarck, and Hayek writing towards the end of World War II described the top-down structure of the German Beamtenstaat: “in which not only in the civil service proper but in almost all spheres of life income and status were assigned and guaranteed by some authority” (Hayek 1944, 131).
While versions of corporatism migrated to Vichy France and the Iberian Peninsula, Phelps observes that, although at least during the interwar years, England and the United States were not subject to the same levels of government intervention as in Europe, the New Deal marked a definite departure from 19th –century liberalism (Phelps 2013, 153), and indeed from that of Mises and Hayek which supposedly won the debate against socialism. Moreover, Mises saw little difference between socialism and Nazi corporatism: “In Hitler’s Germany there was a system of socialism which differed from the Russian system only to the extent that the terminology and labels of the free economic system were still retained. There still existed “private enterprises” as they were called. But the owner was no longer an entrepreneur, the owner was called a ‘shop manager’ (Betriebsfuehrer).” As Mises goes on to point out, the whole country consisted of a hierarchy of fuehrers from Hitler down, with orders proceeding from the Reichsfuehrerwirtschaftsministerium under Goering to every enterprise, where all facets of production and wages were controlled by the state (Mises 1979, 47-48).
As for the post-war years, Phelps notes that Germany under Erhard moved away from corporatism and back in the direction of laissez-faire, as did various countries in Europe as they took steps towards economic union. However, if more recent interventionist trends are any indication, corporatism has not disappeared and indeed, in the case of France, for example, whose corporatism dates back to the ancien regime, Phelps contends that: “there was no country in Europe more hostile than France to “market society” and more alienated from business life” (Phelps 2013, 162-163).
Although Britain had been one of the countries where Phelps considered the modern economy to have taken hold, it was much slower than its former enemy Germany to pick up steam after the war, with one historian noting that in many ways the years immediately following the war were more difficult than the war years themselves” (Kynaston 2007, 633). Of course this would come as no surprise to Mises who argued that Atlee’s postwar socialism was simply a continuation of Churchill’s wartime socialism. This included the later nationalization of industries such as steel and the railways which were already under government control during the war.
Unlike Phelps, who refers to corporatism as “The Third Way”, Mises did not think there was a third way between capitalism and socialism, but that repeated government intervention in the market would lead to socialism (Mises 1979, 48-52). Although the British Labour Party claimed to have espoused socialism, in Phelps’s view the British economy was corporatist rather than socialist, on the grounds that state owned enterprises were only responsible for roughly 1% of economic output for much of the postwar period. If Britain is less corporatist than other G7 members, this is largely as a result of the reforms of succeeding Thatcher governments from 1979-1990 (Phelps 2013, 163- 164).
But in case we thought that corporatism was confined to Europe where it started and remained influential, Phelps goes on to claim that the leading light of the modern economy, the United States, has become increasingly corporatist since World War 2. Although the level of red tape, as one measure of corporatism, has tended to be less than Europe, other measures such as union power are comparable, as well as the huge increase in both regulation and litigation which has dampened initiative and innovation.
More recent developments in corporatism have added other features to its traditional dirigisme and love of social cohesion, such as codetermination (Mitbestimmung der Arbeiter) and stake-holderism, resulting in, if not very large government, then, as Phelps puts it, “unlimited government” (Phelps 2013, 167). Mises sees the belief in the omnipotent state as a hangover from past traditions about the divinely appointed monarch (Mises 1979, 52-53), having as its modern corollary: “The dogma that the State or the Government is the embodiment of all that is good and beneficial and that the individuals are wretched underlings, exclusively intent on inflicting harm upon one another and badly in need of a guardian…” (Mises 1947, 16).
One of Phelps’s chief concerns is that the innovation and dynamism which accompanied the arrival of the modern economy now seem to have petered out, largely he thinks, because the avatars of capitalism have become every bit as corporatist as the older more traditional economies. As he writes: “The system is less blatant than Bismarck or Mussolini. But its political nature is similar: it draws no line between the state and the market, this it creates a parallel economy that competes with the market economy and is another source of risk, scaring off innovations. Corporatism’s managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advances. Corporatists, like the communists before them, assumed that all their wishful goals were possible without cost.” He further notes that it is typical of corporatists to lay the blame on corporations and banks instead of government (Phelps 2013, 265-267).
The indictment continues in the final chapter: “In the public sector, corporatism has spread from Europe to America and metastasized into clientelism, 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 protection of vested interests chokes off the opportunity that outsiders with new ideas would have to break into the market. All this has further reduced the supply of innovation” (Phelps 2013, 314).
Further, given his view that the state does not have the expertise to improve on market allocations of investment, Phelps notes the sorry record of GSEs in one industry after another. Although he cites subsidies to various green industries as subject to similar unintended consequences, Phelps stops short of a fuller assessment of the economic threat posed by the environmental policies which underwrite such subsidies, of the sort provided, for example, by Salerno: “To the extent that such policies go beyond the protection of individual rights and property—and they are now far, far beyond this point—they become antisocial and destructive of capital and living standards. In fact, in many if not in most cases, it is the obliteration of economic productivity per se which is intended and which constitutes the in-kind welfare subsidy to the well-heeled and well-organized minority of upper-middle class environmentalists” (Salerno 1990, 70).
Again, although Phelps agrees that government home ownership policies had much to do with the 2008-2009 financial crisis (Phelps 2013, 236), and that the state should not be in the business of subsidizing entities like Fannie Mae and Freddie Mac (Phelps 2013, 320), Thomas Woods comes to the more radical conclusion that these entities should be put into receivership, and their assets privatized (Woods 2009, 148).
While Phelps claims that little help for the decline in innovation and productivity is to be expected from either “the standard theories” or politics, he hopes that education might be a way to get us back on track. For example, we might imitate one of France’s grandes ecoles, such as Science Po, but in the next breath goes on to note the silliness of the French politician who claims: “they would create value from their ministries” (Phelps 2013, 320). Indeed, the way ministries create value was aptly illustrated in another brick story by Howard, where the OSHA cited a brick manufacturer for failing to provide a material safety sheet with each pallet of bricks. This was to cover instances where bricks might need to be cut, thus releasing small amounts of silica into the air. The brick companies objected not only to the increased paperwork but also that it constituted an invitation to lawsuits (Howard 1994, 37).
Even if there is some question as to how much help France’s institutions might provide, Phelps appears to hold out some hope that our own secondary and tertiary education systems might help us find our way back from the traditional values which Mises thought were antithetical to capitalism and innovation (Phelps 2013, 324). Of course they might, but in their present corporatist/statist incarnation, their chances of improving on anything the French have to offer are slim indeed.
Finally, although he lists Rawls as one of the giants who inspired and influenced him (Phelps 2013, 351) it seems to me that the attention he gives to Rawls’s views is out of all proportion to any assistance the latter’s philosophy could be expected to provide in helping him revive the modern economy. Phelps thinks that Rawls can show us how to make an economy not only modern but also just. In order to qualify as just you may recall Rawls’s two principles of justice: “First: each person is to have an equal right to the most extensive basic liberty compatible with a similar liberty for others.”
If Rawls had stopped there, libertarians/Austrians might have thought that this was a move in the right direction. But then there is the second principle which is supposedly compatible with the first: “Second: social and economic inequalities are to be arranged so that they are both (a) reasonably expected to be to everyone’s advantage, and (b) attached to positions and offices open to all” (Rawls 1971, 60).
Here you might wonder who is to do the arranging of the inequalities and seeing to it that all have a crack at the pork barrel. Well it seems that under Rawls it would be business as usual in the corporate state. Apparently all Rawls had in mind with liberty was civil liberties (Rawls 1971, 243), such as freedom of speech and religion, while economic liberty, the foundation of the modern economy, doesn’t get a look-in.
Of course we should also point out that this is not the justice Mises had in mind when he said that people should be required to “respect the lives, health, personal freedom, or private property of others” (1985, 37). Rather of course, Rawls is talking about “social justice”, and this, as has been bellowed ad nauseam from the ramparts, is synonymous with equality. Thus Anthony de Jasay has recently remarked: “Egalitarian thought, however, is triumphant as it tacitly identifies equality with social justice. As justice is superior to injustice, so social justice must be superior to social injustice. In this suggestion, there is a telling parallel with the famous Indian rope trick: the magician throws a rope up in the air; the rope stays upright and bears the weight of the person climbing up on it. Like the consumers of egalitarian theory, the spectators are convinced” (de Jasay 2015, 3).
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