Edmund S. Phelps has just won the Nobel Prize for Economics, and in 2006 the Wall Street Journal featured his fascinating views on capitalism. Extract follows.
The American and Continental systems are not operationally equivalent. Let me use the word “dynamism” to mean the fertility of the economy in coming up with innovative ideas believed to be technologically feasible and profitable.
In this terminology, the free enterprise system is structured in such a way that it facilitates and stimulates dynamism, while the Continental system impedes and discourages it…The issues swirling around capitalism today concern the consequences of its dynamism. The main benefit of an innovative economy is commonly said to be a higher level of productivity – and thus higher hourly wages and a higher quality of life.
There is a huge element of truth in this belief…Much of the huge rise of productivity since the 1920s can be traced to new commercial products and business methods developed and launched in the U.S. and kindred economies. – these include household appliances, sound movies, frozen food, pasteurized orange juice, TV, semiconductor chips, the Internet browser, the redesign of cinemas, recent retailing methods.
There were often engineering tasks along the way, yet business entrepreneurs were the drivers… Productivity levels in the smaller countries will always owe more to innovations developed abroad. Some might suspect that the domestic market is so tiny in a country such as Iceland, for instance, that even in per capita terms only a very small number of homemade innovations would bring a satisfactory productivity gain and an adequate rate of return. In fact, most of the Continental economies have been content to sail in the slipstream of a handful of economies that do the preponderance of the world’s innovating.
The late Harvard economist Zvi Griliches commented approvingly that in such a policy, the Europeans “are so smart.”
I take a different view. For one thing, it is good business to be an innovative force in the “global economy.” Globalization has diminished the importance of scale as well as distance.
Tiny Denmark sets its sights on markets in the US, EU and elsewhere. Iceland has entered into European banking and biogenetics. France has long done this. But it could do so more successfully if it did not insulate its innovational decisions so much from evaluations by financial markets e.g. Airbus.
Go to http://www.opinionjournal.com/editorial/feature.html?id=110009068