How Grassroots Innovation Created Jobs, Challenge and Change
Mass Flourishing is a deceptive title for a remarkable book. It covers several centuries of thought; has a range that moves from economics into politics, literature and philosophy; places short-term events on a long timeline; helps understand the implications of patchwork policies over the fabric of economies.
The book engages with the concept of a "modern economy". How do we achieve happiness and a just and equitable society? The process of unravelling modern economy leads to a discussion of multiple ideas: Capitalism, Socialism, Marxism, Corporatism are all discussed in the context of economic growth, common good and happiness. Prof Phelps uses data, but also draws on art and literature to assess how people were perceiving the changes.
Prof Phelps connects several unrelated events to trace the evolution of modern economy. The real increase in wages; reduction in incidence of disease because of advancement of science; and reduction of poverty and pauperism. He then examines urbanisation. He argues that rural areas had under employment but never unemployment. By working for somebody, an enterprise defined what employment was, it sharply defined unemployment as well.
Just ideas and inventions do not result in economic phenomena. Protecting intellectual property makes sense only when there is a possibility of commercial exploitation of the idea. Commercial exploitation needs scale, if ideas have to move beyond the individual capability. The idea of a joint stock company with a limited liability clause provided the entrepreneurs some protection. The legal framework for this first came in the United States; moved to Great Britain and then extending all the way to Germany and France. This was followed up by better bankruptcy protection laws and a banking system.
On the political front, the movement towards representative democracy provided an ecosystem for accountability. Accountability supported the interests of the underserved moving towards publicly funded education and healthcare. While there were downsides, the larger ecosystem for enterprise to flourish was more likely in a representative democracy.
The modern economy brought taxation that collected money from the wealthy to provide social security for the deprived. This brought to the fore, the question of inclusivity. Does the modern economy and its growth provide opportunity for everybody to get employment and a share in the economic action? Prof Phelps argues that if capitalism is working, with other institutional mechanisms fostering innovation, the answer is yes. But most of the time capitalism does not work the way it ought to - the governments direct the economic space in a manner that stymies innovation and free trade.
Prof Phelps argues that the age of innovation and mass flourishing happened between 1820s and the 1960s. He argues that this was a western phenomenon led by the United States and followed by European nations. China, though it had the ingredients of density of population, exchange of ideas, innovation and even enterprise did not keep up as it lacked economic institutions and economic culture (p. 106).
Prof Phelps then discusses economic thought that was against the concept of modern economy - Socialism and Corporatism. The discontent with the modern economy was with the precariousness of jobs and wages - the episodic high unemployment and recession-led job losses in certain sectors. Prof Phelps sees socialism as a concept with inherent contradictions, examining tension between socialist values and Western humanist values. While Prof Phelps looks at socialism as an ideology to be debated and critiqued, Corporatism does not have strong ideological roots. However he engages with the concept at length, citing examples from Europe, where it evolved, how it grew and why it was not a positive thought for the modern economy. Prof Phelps argues that corporatism was anti- innovation, anti-enterprise and growth. He even indicates that the reason for the decline of the Western enterprise, particularly of the United States, was because of the modern day corporatism.
The last section, "Regaining the Modern", deals with the approach to taxation. Low taxation, heavy borrowing - and spending - both on welfare as well as a supply side Keynesian measure to maintain growth leading to very high fiscal deficits, was unsustainable. Not only did the State borrow, but it encouraged corporations and individuals to borrow - in the hope that this would lead to growth and larger tax collections. That this did not work, is there for us to see. A moderate tax regime with a wider net gave the State enough resources for funding infrastructure and public projects. A low tax regime, wider compliance and exemptions at the lower level resulted in an illusion of "reduction in take home inequality" but actually reduced investments in public infrastructure leading to the poor paying out of pocket for some services (education, healthcare) that should have been available in public domain.
This book is vast in its expanse, deep in its insight and philosophical in its approach. The canvas laid out by Prof Phelps overwhelms you, but this is by far one of the best treatises written on the concept of a modern economy.
The writer is with Centre for Public Policy, Indian Institute of Management, Bangalore.