What are the implications of declining productivity growth in high-income countries?

The graph shown above indicates that productivity growth rates in high-income countries have declined. That decline seems evident even if we disregard the low productivity growth in the years immediately following the global financial crisis. (Selection of high-income countries for inclusion in the graph was based largely on aggregate GDP.)

The productivity indicator used in the graph - multifactor productivity (MFP) – is that part of GDP growth that cannot be explained by changes in labour and capital inputs. It reflects the influence of technological progress and production efficiency.

The most obvious implication of a decline in MFP growth rates is a lower rate of growth in per capita incomes. Declines in MFP growth are sometimes offset by more rapid growth of employment, through higher immigration, or more rapid growth of capital stock, through higher investment levels. However, such offsetting factors are not sustainable over the longer term.

In most instances, and in the longer term, it seems reasonable to expect a ½ percent lower rate of growth in MPF to be reflected in a ½ percent lower rate of growth in average incomes. Over 10 years, a decline in average income growth from, say, 2 percent per annum to 1.5 percent per annum would amount to the difference between a 22 percent and 16 percent increase in income.

That is not negligible, but it doesn’t cause me a great deal of angst. As noted previously on this blog (in a post written when I was more sceptical about the number of countries experiencing a decline in productivity growth) the slow-down in measured productivity growth in the U.S. and some other countries may be attributable, in part, to difficulty in measuring the outputs of the information and communications technologies (ICT) industries. When consumers can download more stuff that they do not have to pay for, the quality of their lives improves, even though that isn’t reflected in average income and consumption measurements.

It is also likely that some part of the decline in measured productivity growth may be attributable to environmental and social regulation. I am sceptical about the merits of much of that regulation, but I acknowledge that some of it provides benefits to humans that should be offset against associated income losses.

However, there is an implication of declining productivity growth that governments and their dependents should be thinking more seriously about. That is the potential for revenue growth to decline. Unless the revenue to GDP ratio is raised, a lower rate of growth of MFP is likely to translate to lower growth of government revenue. (Note that the same difficulty in measuring the outputs of the ITC industries for productivity estimation also applies to measuring income, sales and value added for tax purposes.)

Lower revenue growth has interesting implications in the context of expected ongoing increases in government spending. As previously discussed on this blog, under existing programs, substantial increases in government spending seem likely to occur as the proportion of elderly people in the populations of many countries continues to rise.

So, why not raise the revenue to GDP ratio by changing the tax mix in favour of more efficient taxes that have less adverse effects on economic incentives? The political obstacles to tax reforms have not always been insuperable, but revenue-raising reform proposals are less likely to be supported than revenue-neutral proposals.

Another option is to raise the revenue to GDP ratio by raising tax rates. That is also likely to encounter political obstacles but, more importantly, the adverse effects on incentives seem likely to further reduce productivity growth. The marginal excess burden of taxes tends to rise as the tax rate is increased (see discussion here).

Yet another option is to let public debt continue to rise and hope debt servicing doesn’t become too much of a problem. We may actually see some problems emerging with that strategy over the next few years with increased public debt incurred in response to COVID-19. Perhaps central banks will succumb to government urging to over-stimulate economies to allow the “inflation tax” to reduce debt to GDP ratios. However, that would make ongoing debt accumulation a more costly strategy because it would result in high interest rates and thus higher costs of debt servicing over the longer term.

We haven’t considered debt default, but you have to be desperate to consider that!

My point is that governments and their dependents do not have any easy options available to adjust to an ongoing decline in productivity growth.

Economists advising governments will likely suggest that the best way forward is adoption of a package of reforms (including tax reforms) to raise productivity growth, combined with action to prune government spending. What governments will do, however, will depend to a large extent on the relative political power of different interest groups. In most countries, that seems to me likely to point more toward spending cuts than toward productivity-increasing reforms.

So, it seems reasonable to speculate that declining growth in productivity will be ongoing and result in cuts in government spending in policy areas where political resistance is likely to be weakest. Which policy areas are likely to be most affected?

What are innovation commons?

“An innovation commons is a system of rules for cooperation to facilitate pooling of information in order to maximize the likelihood of opportunity discovery”. That is how Jason Potts defines innovation commons in his book of that name.

Hopefully, that brings to mind hobbyists meeting in coffee shops, somewhere on the internet, or at backyard barbecues where they are tasting home brews and exchanging information about recipes. If so, you are on the track toward an understanding of innovation commons. If you have heard stories of successful entrepreneurs who obtained their most valuable ideas by interacting in similar ways, you might sense that innovative commons can be very important.

It might surprise you to learn that until recently few economists understandood the importance of innovation commons. Of course, those with an interest in technology would have read at some stage that Steve Jobs was once a member of the Homebrew Computer Club, and know of similar stories about other entrepreneurs who started as hobbyists or enthusiasts exchanging information freely with people with similar interests. However, it is one thing to know such stories and something quite different to realize that your professional understanding of the innovation process needs an overhaul.

Economists have thought of innovation in several different ways that view a single organization or individual as a prime mover. Innovative firms allocate resources to research and development, which leads to the launching of new products or adoption of cost-reducing technologies. Joseph Schumpeter’s bold entrepreneurs play the central role in innovation, leading to a dynamic process of creative destruction. Israel Kirzner’s innovative entrepreneurs are alert to profit opportunities. Edmund Phelps’ grassroots innovators are struck by new ideas, and then become investigators, experimenters and managers of innovation.

You might think that economists should be excused for overlooking the importance of innovative commons because they are a relatively new phenomenon. Jason Potts makes the point that common-pool innovation has existed since the beginning of market capitalism. He cites discussion of the Republic of Letters by Joel Mokyr, an economic historian. The Republic of Letters set up norms and incentives that supported a market place of ideas among the educated elite in Europe in the latter part of the 17^th and early part of the 18^th centuries (for a brief summary see my review of The Culture of Growth). In The Enlighted Economy, Mokyr makes a strong case that in Britain during the 18^th century the ‘legitimization of systematic experiment carried over to the realm of technology’. He suggests that the proliferation of provincial ‘philosophical’ societies discussing practical and technical issues often served as clearing houses for useful knowledge between natural philosophers, engineers and entrepreneurs (p 48).

Recent examples of areas of technology where innovation commons are important include blockchain, civilian drone technology, AI and gene editing.

Jason Potts’ own innovative contribution has been to develop an economic framework to explore the collaborative processes through which information comes to be available in a form that a potential entrepreneur can discern as a profit opportunity, if sufficiently alert. The framework Jason has developed contributes to understanding of the knowledge, coordination and governance problems associated with innovation commons. In developing that framework, he draws heavily on insights of Friedrich Hayek about the importance of distributed knowledge, and insights of Elinor Ostrom about governance of commons.

Innovation involves a knowledge problem because relevant information is distributed so that each person with relevant expertise can only know part of the picture, and there is great uncertainty about how that information might be useful. Innovation commons enable individuals with expertise to cooperate to pool information and discover opportunities. The formation of such commons is ad hoc and rules for governance develop spontaneously to promote cooperation.

Innovation commons tend to be temporary. Once they have created information about entrepreneurial opportunities, that valuable resource is likely to be exploited by some member who can effectively capitalize on it. At that point the conventional model of entrepreneurship comes into its own, and the commons collapses to some other institutional or organizational form.

Much of the book is taken up by discussion of rules of innovation commons, institutions such as industry organisations and a critique of conventional approaches to innovation policy (public investment in innovation and building infrastructure for innovation).

There is also an interesting discussion of ways to combat an increasing tendency for enemies of innovation to prevent it, thus contributing to a slowdown in productivity growth, particularly at the technology frontier. The enemies of innovation present themselves as having concerns with safety, sustainability, tradition, fairness, justice etc. even when their intention is to avoid the losses they are likely to incur from disruption of existing technology.

Who will engage those enemies? This is a collective action problem: the costs are borne individually, but the benefits are an industry-specific public good that accrue to all who follow.

In some instances, the first mover can capture sufficient benefits to make it worthwhile to engage the enemies of innovation. Uber may have done that with its ride-sharing technology.

Jason suggests that governments may also help. One role he suggests is promoting collective learning to demystify a new technology. He mentions public broadcasting in that context, but public broadcasters seem to have been more comfortable helping the enemies of innovation. At a more ambitious level, he suggests that governments should work toward “a social contract, culture and institutional system that are tolerant of innovation and prepared to engage with its enemies”. Good luck with that!

Jason also suggests that innovative commons can play a role in creating a large pool of participatory stakeholders, each with a vested interest in developing the technology and its institutional (regulatory) framework. Examples include open-source software and technologies that have emerged from hackerspaces, such as 3D printing and cryptocurrencies.

Are innovative commons likely to result in a fundamental change in society?

Jason Potts’ answer:

“The innovation commons—including the adaptive behaviors and the institutions that compose it—are … a natural part of an open, evolving, market economy. They are not prima facie evidence of an emerging turn to a new type of more cooperative economic society.”

That is probably right! Nevertheless, as previously discussed here, it is possible to conceive of circumstances in which new technologies that are evolving in innovation commons - blockchain technology and decentralized collaborative organizations – could result in some quite fundamental changes in society.

What did Yeats mean by "Horseman, pass by"?

In one of the most popular articles on my blog I speculated about the meaning of the epitaph on W B Yeats tombstone:

“Cast a cold Eye

On Life, on Death

Horseman, pass by”.

The article was posted in October 2013 and has attracted many comments since then.

A few hours ago, Beth Prescott sent me a comment by email, which I am reproducing below, with her permission.

However, before reading Beth’s comment, it would be helpful for you to read an anonymous comment that she refers to:

“In ancient China, there is a phrase said "Human life is just like a white horse pass by a tiny crevice, it's only a blink of time." This phrase comes from the philosopher Zhuangzi's book, "Zhuangzi: Knowledge travel to the North". And the story in the book is that, when Confucius asking Laozi what is "Zhi Dao(至道,the basic reason of everything)", and Laozi answered with this phrase, and told Confucius that either life or death is inevitable and common in life, it is just a change of matter, there's no need to happy or mourn. But "Dao" is the only eternity through a man's spirit. If Yeats did take this story in his mind, then perhaps he agreed Laozi by writing these lines.
This is just my thought, and sorry for my grammar mistakes, I'm not an English speaker.”  

I think the ancient saying referred to by my correspondent can be sourced to Chuangtse. I found something very similar in The Wisdom of Laotse, and have reproduced it above.

Beth Prescott writes: 

"Horseman, pass by”

“I've been hearing this phrase in my head for several days - entirely without knowing where it came from or whom it came from. So, of course, I Googled it and quickly came upon your blog post about it from several years ago. I don't know Yeats well. I've always been intrigued and curious, but life has so far never permitted a long perusal of him and his life.

In fact, I am so distracted by current events I couldn't even make myself read the entire poem. Usually I can settle to a task better than this, but not now.

I did read through all the comments to your blog and was arrested by the anonymous comment from, presumably, a Chinese person. His (or her) use of English was very familiar to me, since I have worked with and for Chinese American researchers here at the University of Oregon.

It was the image he evoked of a white horse striding past a crevice in a rock and that that tiny crevice was the whole of a human life, even perhaps, the whole of human history. It reminded me of something an older brother told me 60+ years ago: ‘maybe the entire universe and all of its seeming eternity of time is really nothing more than the air in somebody's tire, and someday the tire may have a flat’. I think my brother added in that last bit.

This image has stuck with me all of my life: that we are necessarily constrained by our worldview and cannot easily - or at all - look outside of it. The idea that even our vast universe is really part of something else, something unknowable, something much vaster and more sweeping, something with a different purpose, possibly utterly different.

That what we think is important is, yes, important to us and we must live our lives as if these things are important. They are important. To us. Workmen must continue to work. Cradles must continue to be filled.

But we should also live our lives with the understanding that there is ‘something else going on’ and that the forces that gave rise to us and to our universe are probably beyond our understanding. Our entire universe, our entire history of life is perhaps no more than the instant in time it takes for a white horse to stride past a small crack in a wall.

If Yeats absorbed the philosophies of other cultures and times, as it appears that he did, then I think in this poem he was striving to arrive at a different perspective, a different view of himself, of his own place in the grand scheme of things, of his entire life.

I think he is saying in those final lines, that he realizes that all of the Sturm und Drang of his own life is in reality nothing more than a sliver of an insignificant moment in some much larger scheme. I think he is affirming that teaching of Lao Tze. That when he says ‘Horseman, pass by’ I think he is affirming - in a very positive way - this view of life.  He is even content with it. A quite remarkable final thing to say to the world."

Thanks Beth!

How can governments mitigate the impact of COVID-19 on human flourishing?

This is an appropriate question for economists with an interest in public policy to be considering. It recognizes a possible role for governments and recognizes that an approach focused on human flourishing is likely to be more appropriate than one focused entirely on reducing the death rate or reducing adverse impacts on GDP.

The possible role for government stems from the perception that people who are most vulnerable would not able be to protect themselves adequately without some government intervention. People who know they are vulnerable have a strong incentive to practice social distancing, but personal circumstances often make that difficult. Without the threat of coercion, it is unlikely that we will see the degree of social distancing necessary to reduce the rate of spread of the virus. In that event, hospital services are likely to be over-whelmed by the number of people requiring treatment. 

As always, with government intervention, there is a risk that the cure will end up worse that the disease, but the risk is probably worth taking in this instance.

What is the appropriate indicator of human flourishing to be used as a policy objective? There isn’t just one! The prime candidates, per capita GDP and average life satisfaction both suffer from the same flaw – they don’t account for the impact of early death on the well-being of the dear departed. We should continue to consider the impacts of policies on death rates as well as their impacts on the well-being of the living.

Per capita GDP was never intended to be a measure of well-being, but it is relevant. Many factors that impinge on well-being – such as the ability of people to afford food, housing and health care – are influenced by per capita GDP levels. However, per capita GDP cannot account for impacts of coercive policy interventions, such as enforced home confinement, on psychological well-being.

Average life satisfaction seems to be a reasonable indicator of the average psychological well-being of groups of people. It is a poor indicator of economic and social progress because it doesn’t account for the extent that members of one generation perceive themselves to be better off, or worse off, than members of preceding generations. Fortunately, that deficiency is not pertinent for present purposes.

There is some evidence that lock-down and GDP decline have potential to have substantial negative impacts on average life satisfaction.

An article entitled ‘Health, distress and life satisfaction of people in China one month into the COVID-19 outbreak’, has recently been published by Stephen X Zhang, Yifei Wang, Andreas Rauch, and Feng Wei. The article is a pre-print and has not been subjected to peer review, but no major flaws are obvious to me. As might be expected, the study suggests that the life satisfaction of people with chronic medical conditions was adversely affected in locations with severe outbreaks of COVID-19.

However, the life satisfaction of people who exercised a lot was also adversely affected in locations with more severe outbreaks, suggesting frustration at restrictions imposed. Those who were able to continue to work had higher life satisfaction than those who had stopped work, with people who were able to work “at the office” having higher life satisfaction than those who worked at home.

The relationship between per capita GDP and average life satisfaction is complicated. Average life satisfaction is relatively high in countries with high per capita GDP, but tends to grow very slowly, if at all, as per capita GDP rises further in such countries.  However, there is some evidence suggesting that when per capita GDP falls in high-income countries, this is likely to be accompanied by substantial declines in average life satisfaction. Austerity in Greece reduced per capita GDP by about 26% over the decade to 2017 and was accompanied by a decline in average life satisfaction of about 20% (GDP data from OECD and life satisfaction data from World Happiness Report, 2020).

Hopefully, COVID-19 will result in much smaller declines in per capita GDP than in Greece. and economic recovery will be much more rapid.

What are the trade-offs involved in shut-down? The human welfare implications of shutting down large parts of an economy for an extended period are enormous. However, a short close-down of all those activities in which social distancing is difficult might be preferable to a less severe and more prolonged lock-down. Tomas Pueyo’s discussion of the hammer and dance (see graphic above) makes sense to me, even if the Hammer needs to last more than 3-7 weeks.

Social distancing and lock-down is an investment in buying time. Buying time for what? It can’t be for development of a vaccine. That will take too long!

It makes sense to buy time to build up the stock of respirators, ICU beds etc. to help cope with an influx of hospital patients needing treatment.

It also makes sense to buy time to obtain testing equipment that can give accurate results within a short time frame. Speedy and accurate testing has potential to enable infectious people to be detected and temporarily taken out of circulation, so that the rest of the population can return to something like normal life.

This post has not yet referred to stimulus packages. I support giving money to people to help them survive a crisis that is likely to depress aggregate demand. Please note, however, that what people can buy depends ultimately on what is produced. When an economy closes down the necessities of life tend to become scarce.

My conclusions:

• Policies to mitigate COVID-19 should be considered from a human flourishing perspective rather than solely in terms of either minimizing deaths or minimizing damage to an economy.

• The best policy seems to be to buy time by enforcing strict social distancing for a relatively short period rather than less strict distancing for a longer period. The policy aim should be to buy enough time to enable hospitals to cope better with an influx of patients and to put in place a testing regime that can enable life to return to something like normal as soon as possible.

Postscript: May 6, 2020

There isn’t a great deal of substance that I would like to change in this article with the benefit of 6 weeks hindsight. The graphs showing possible outcomes in terms of exponential growth and bell curves still look right. Some countries, including Australia, have moved along to the end of “the hammer” phase of the bell curve and are beginning the tricky “dance”. Perhaps infection rates may be greatly under-estimated and there is now considerable herd immunity, but I doubt it.

Although the governments of some countries are behaving abominably, at this stage I am confident that in Australia the intervention ‘cure’ (palliative might be a better word) will not be worse than the disease. To a large degree, the shutdown occurred spontaneously, with governments playing catchup, as large numbers of people stayed home, and businesses shut down. There has been some coercion, e.g. shutting of beaches in metropolitan areas and travel restrictions. Some police have risked public goodwill by excessively diligent (stupid) enforcement, e.g. picking on individuals sunning themselves in parks many metres away from any other human. Most people seem to be following social distancing rules because they accept that it is a sensible precaution to take for their own benefit and/or the benefit of others.

From an analytical perspective, I have been reminded that it is possible to incorporate deaths and economic considerations in a common metric if you try hard enough. Richard Layard, Andrew Clark et. al. have presented a WELLBY analysis that seeks to do that in a paper entitled, ‘When to release the lockdown: A wellbeing framework for analysing costs and benefits’. The authors use estimates of wellbeing-years (based on life satisfaction surveys) to balance the impact of policy decisions upon the number of deaths from COVID-19 against incomes, unemployment, mental health, public confidence and other factors (including CO2 emissions).

Their analytical framework looks elegant, but I am concerned about the implied policy context. It seems to me that this kind of analysis is more relevant to decision-making by a benevolent dictator (one applying utilitarian philosophy) than to a society where government should see its prime responsibility as protecting the lives and liberty of citizens.

Another article that has been brought to my attention is: ‘Some basic economics of COVID-19 policy’, by Casey Mulligan, Kevin Murphy and Robert Topel. This article looks at the trade-offs we face in regulating behavior during the pandemic.  It uses conventional cost benefit analysis to consider several possible policy objectives, including buying time and limiting the cumulative cost of a pandemic that will ultimately run its course. They conclude:

“The key difference in terms of the optimal strategy is whether our focus is on keeping the disease contained. If the objective is to buy time, then our analysis favors early and aggressive intervention. This minimizes the overall impact … . In contrast, limiting the cumulative cost of a pandemic that will ultimately run its course argues for aggressive policies later, when they will have the biggest impact on the peak load problem for the health-care system and when they will have the greatest impact on the ultimate number infected”.

The authors conclude by listing some simple economic principles to guide how public policy should proceed when faced with a new but poorly understood pandemic. Those principles include buying time upfront, and using that time wisely to gather information to implement a screen, test, trace and quarantine (STTQ) policy. They suggest that both the “buy-time” and long-term containment strategies will have to be based on an effective STTQ policy.

The approach adopted by Mulligan et. al. of considering the nature of trade-offs and suggesting policy principles is more to my liking. If these authors had used their conventional cost benefit analyses to provide specific recommendations of the kind provided by Layard et. al. I would raise the same concerns about the implied policy context of advising a benevolent dictator, rather than informing a democratic political process.

I have misgivings about the valuation of life in both studies, but have not considered the relative merits of each approach, and have nothing better to offer other than directly considering the economic cost of saving lives under alternative strategies.  

Does dialogue imply recognition of natural rights?

Two philosophers, John and Robert, were travelling in a lawless country when they were attacked by two bandits. In the initial exchange of gunfire, Robert and one of the bandits were killed. The other bandit had John in his sights, and John thought he was about to be shot.

John shouted: “Please don’t kill me. That would be a violation of my natural rights”. The bandit laughed. “I don’t believe in natural rights”, he said. “Around here, I decide who has rights, and you don’t have any.” 

The bandit moved closer, so John didn’t need to shout his response: “The government of the country I come from also takes the view that there are no natural rights. It claims that it has the authority to decide who has rights and what rights they have. It is wrong and so are you”.

The bandit asked John to explain what was wrong with claiming that rights are determined by the people with power. John replied: “By engaging in dialogue with me about rights, you are implicitly recognizing my natural right to self-direction. If I didn’t have that right, I would not have been able to consider your argument and to reject it”. 

The bandit laughed again, before asking: “Where did you get that idea from?”. John explained that the idea had come from Hans-Hermann Hoppe.^[i]

While John was explaining Hoppe’s idea, the bandit became distracted by a wasp hovering around his face. John took advantage of the situation to pull out a small handgun that he had concealed in his clothing and to point it at the bandit.

With the tables now turned, John said: “Give me good reasons why I shouldn’t shoot you”. The bandit pleaded that he didn’t deserve to be killed because that would be disproportionate punishment. He explained that he was not responsible for killing Robert and said that he didn’t intend to kill John.

John responded: “In the defence that you have just presented, you have claimed the right not to be subjected to disproportionate punishment. That means you have contradicted your earlier statement that you do not believe in natural rights. Have you changed your mind? Do you now believe in natural rights?” 

The bandit claimed that he did now believe in natural rights. John was not sure that he was being truthful, but had already decided to spare his life. John decided that, under the circumstances, it would be enough punishment to lecture the bandit at length about the principle of estoppel, that Stephan Kinsella has applied to natural rights dialogue.^[ii]

A couple of days later, John was discussing the incident with Peter, another philosopher friend, whom he knew had often claimed to be a natural rights skeptic. After John had related his story, he added the thought: “I am now having regrets that I didn’t shoot that bandit when I had the chance”. Peter responded: “No, you did the right thing! Killing him would have been disproportionate punishment”.

John saw an opportunity to make an important point: “Peter, do you realize that by acknowledging that there is such a thing as disproportionate punishment you have implicitly recognised the existence of natural rights?” John then gave Peter a reference to Stephan Kinsella’s discussion of rights scepticism.^[iii] 

I leave it for you, dear reader, to decide how this story might end. I would like to think that the bandit and Peter have both now stopped claiming that they don’t believe in natural rights.

---

[i] Hoppe, Hans-Hermann, 1989, A Theory of Socialism and Capitalism: Economics, Politics, and Ethics.

[ii] Kinsella, Stephan, 2019, ‘Dialogical Arguments for Libertarian Rights’, The Dialectics of Liberty: Exploring the context of human freedom, edited by Roger Bissell, Chris Matthew Sciabarra and Edward W Younkins, loc 1852-1886/8713.

[iii] Kinsella, op.cit. loc 1886-1921/8713.

Is cultural change responsible for a long term decline in productivity growth?

The story of cultural change that Edmund Phelps tells in Mass Flourishing has a happy beginning and a sad ending.

Phelps’ cultural story of the advent of rapid economic growth in Britain and America in the 19^th century is much like that of Joel Mokyr and Deidre McCloskey (discussed here and here). The main difference is Phelps’ greater emphasis on grassroots innovation within firms.

Phelps makes a strong case that Joseph Schumpeter, famous for his theory of entrepreneurship, over-emphasized the importance of exogenous scientific discoveries (external to innovating firms) as a source of innovation. Phelps probably goes too far in downplaying scientific advances, but his story about the importance of grassroots innovation to the emerging modern economies seems highly plausible. He suggests:

“a modern economy turns people who are close to the economy, where they are apt to be struck by new commercial ideas, into the investigators and experimenters who manage the innovation process from development and, in many cases, adoption as well” (p 26).

Phelps describes a modern economy as “a vast imaginarium – a space for imagining new products and methods, imagining how they might be made, imagining how they might be used” (p 27).

A substantial part of the book is devoted to a discussion of socialism, as practiced in the Soviet Union, and corporatism, as practiced in Italy and Germany in the 1930s. The contemporary relevance of that discussion become relevant later in the book in his discussion of reasons for the decline in productivity growth that seems to have occurred in the U.S. since the 1960s.

Phelps’ focus on the U.S. economy as the main driver of technological progress seems appropriate. He notes that European countries experienced high productivity growth while playing the technological catch-up game, but their productivity growth has generally been lower than in the U.S. in recent decades. He attributes their lack of dynamism to ongoing corporatism over the decades since World War II. The classical corporatist model - involving state direction of industry and promotion of solidarity and social responsibility – has been augmented with codetermination of labour and capital (instead of owner-control) and stakeholderism (instead of a focus on income generation).

The author suggests that corporatism has also grown in the United States. Industries that have been subject to government policy interventions have been affected by a new populist type of corporatism as businesses have sought to use their political influence to mould government regulation to their advantage. The result is a “densely interconnected system of mutually beneficial relationships between private and public’, which tends “to redirect the economy’s innovation toward politicians”. He notes that supporters refer to that system as industry policy and detractors refer to it as corporate welfare. It should be referred to as rent-seeking.

The cultural change that Phelps sees as leading to a decline in economic dynamism is not fully reflected in changes in economic freedom indexes. He sees a deterioration in the “core functioning” of modern economies. This involves, among other things:

• Managerialism, short-termism and the rise of a “money culture” in business, with wealth-seeking turning people away from innovation.
• A rise in the litigiousness of American society - people who devote their time and energy to suing one another have less time and energy for innovation.
• Excessive patent protection resulting in an economy clogged with patents – “a creator of a new method might require as many lawyers as engineers to proceed”.
• More people aspiring to attain social station rather than to achieve something.
• Adolescent culture – less willingness to accept temporary austerity in the quest for achievement; less ability to concentrate intensely (unable to resist distractions of social media).
• A resurgence of traditional values putting more pressure on business to allow people to work from home etc.

Has this cultural change in U.S. business caused a decline in the long-term productivity growth rate? If so, what can be done about it?

In a series of posts written in 2015, I was sceptical that there had been a decline in long term productivity growth. I suggested that the slow-down in measured productivity growth in the U.S. and some other countries may be attributable, in part, to difficulty in measuring the outputs of the information and communications technologies (ICT) industries. I also noted research findings suggesting a technological diffusion problem, rather than a slow-down in technological advances, with productivity growth of global frontier firms remaining relatively robust.

The addition of a few more years of data seems to lend support to the view of the historical pessimists that there has been a long-term decline in U.S. productivity growth. And Phelps’s cultural change explanation does seem plausible.

Unfortunately, the remedies that Phelps offers are less plausible. He suggests that governments can act to restore dynamism if they become aware of its importance and gain some practical knowledge of how innovation is generated. He suggests:

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

Edmund Phelps seems to be hoping that a reinvented corporatism, perhaps inspired by the starship Enterprise, will foster grassroots innovation and be less prone to rent-seeking than the industry policies it replaces. Good luck with that!

I prefer to put my faith in the potential for new technologies to disrupt and subvert populist corporatism.