Edmund S. Phelps was awarded the Nobel economics prize this week, and I just finished reading his Wall Street Journal op-ed titled “Dynamic Capitalism.” Now that I’ve read that, I’ll go to Amazon.com and see what books he has written. I especially like it when I find a writer who has a talent for condensing complex issues into concise, insightful prose that average Joes like me can understand (and remember) easily. Alan Reynolds and Eric Beinhocker are two of those near the top of my list, and now I’ll add Phelps to it. [Thanks to Michael Booth for the link to the WSJ op-ed; I would have missed it otherwise.]
I’ve characterized it as Carrot economics versus Stick economics; others describe it as the difference between two brands of capitalism: the U.S. version versus the continental Europe version. In any case, there’s a dynamic tension between the two camps. Phelps explains to us in his WSJ op-ed that a lot of the tension is due to a misunderstanding:
Why ... 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.
In this blog, I talk a lot about the importance of growth. What is apparently not clear to many subscribers to Stick economics is that the people mostly responsible for growth are newcomers whose new ideas and inventions upset the old applecarts; it is usually not the entrenched old-applecart owners. The result of successful Carrot economics is that new, better ideas displace older, obsolete ideas; new, better jobs displace older, obsolete jobs; new, more lean and effective companies displace the older, sluggish, entrenched fat-cats.
Schumpeter called it “creative destruction.” One camp concentrates on the first of those two words, optimistic that things can be made much better than they are today, and that’s what drives our economy upward and onward. The other camp concentrates on the second word, deeply disappointed that growth makes older, obsolete jobs go away, and that’s a friction that slows the growth process. Much of that tension is due to a misunderstanding; maybe Phelps’s Nobel Prize will attract some attention that will help resolve it.