The Joys of Innovation: For Profit Only

In his inaugural address on March 4, 1933, Franklin D. Roosevelt sought to reassure his fellow citizens that he would devote full effort to putting them back to work and lifting them out of the widespread poverty and destitution into which the Depression of the past three years had sunk so many. But the new president also struck a different tone, departing from the stricken nation’s natural focus on restoring employment and material living standards. “Happiness lies not in the mere possession of money,” Roosevelt declared; “it lies in the joy of achievement, in the thrill of creative effort. The joy and moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits.”

In highlighting the importance of creativity and achievement, and therefore the moral value of work, Roosevelt—the US president who, more than any other, quoted from the Bible and appealed to biblical themes—was harking back to a traditional religious interpretation of humanity.¹ In the account given in Genesis, God created man “in our image, after our likeness.” But what image was that? As of the sixth day of creation, when the story has God making Adam and then Eve, all that God had done was create: first the light and the darkness, then the sky and the earth and the oceans, then plants, then the sun and moon and stars, then birds and fish, and finally—until man, that is—land animals. The essential trait to be imparted when God created man “in his own image,” therefore, was creativity. Although the creation story as we have it is from the Hebrew Bible, the identification of creativity as the intrinsic essence of the human character, on just these grounds, is familiar among Christian thinkers as well.²

Secular thinkers have often expressed the same idea. David Hume, the quintessential Enlightenment philosopher, departed from the traditional Western view, dating to Aristotle, that the distinguishing characteristic of man is reason. Hume argued that it is the human imagination. His protégé Adam Smith followed his lead in this respect. The main theme of Smith’s first book, The Theory of Moral Sentiments, was the paramount role in human relations of what he called “sympathy”; but sympathy of the kind he envisioned—a “fellow-feeling” that requires “placing ourselves in [another person’s] situation”—is possible “by the imagination only.”

Not surprisingly, Smith also wrote about the importance of imagination in his economic analysis. He did not have in mind the modern idea that creative people continuously devise inventions that enhance productivity and therefore enable ongoing economic growth of the kind the West has enjoyed for the past two centuries; he lived too early to understand this process, nor did he envision it. Instead, as he highlighted at the beginning of his second book, The Wealth of Nations, Smith thought improvements in productivity, and therefore in living standards as well, came from increasing specialization and routinization of the tasks individual workers performed—what he called the “division of labor.”

But Smith also understood that the narrower and more repetitive a worker’s job became, the more constricted were the possibilities presented to the human being inside:

The man whose whole life is spent in performing a few simple operations…has no occasion to exert his understanding, or to exercise his invention, in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.

The corrective Smith recommended for the “torpor of [the] mind” to which ever-increasing division of labor would lead was state-sponsored mass education.

In the two-plus centuries since Smith wrote, the tension between the social aspiration for intellectually and morally stimulating work and the basic need to get the economy’s work done has been a continual theme. But starting in around the 1830s, it became obvious that creativity and innovation had practical value as well. By the end of the nineteenth century, especially in the United States, technological progress—the steam engine, railroads and fast ships, electricity and its myriad uses, the telegraph and telephone—were adding as much to the economy’s productive powers as the increased specialization of tasks associated with new methods of mass production. By the end of the twentieth century, throughout the Western world, the drive to generate ever more output from the limited human and other resources available had become largely a matter of pushing out the technological frontier.

Edmund Phelps, a Columbia economics professor who won (and richly deserved) the Nobel Prize in 2006, has thought through this challenging intersection of economics and philosophy. Phelps’s subject, in his wide-ranging book Mass Flourishing, is what he calls “modern capitalism.”³ In his interpretation the crucial feature of this way of carrying out economic activity is not just private ownership of the plant and machinery used for production—he takes this for granted—but the centrality of creativity and innovation, and the resulting dynamism of what a modern capitalist economy produces and how it goes about it. Importantly, therefore, an economy can have private ownership of the means of production and, if it fails to foster creativity and innovation, still fail to qualify as “modern capitalism.” Indeed, that is Phelps’s diagnosis of the Western economies today. Moreover, “the economic growth rate of a country is not a useful measure of dynamism.” Even apart from what remains of its once-pervasive socialist ownership, China is not a modern capitalist economy either.

In the spirit of FDR, as well as of Hume and Smith along with the more recent thinkers on whom he draws (he especially favors the philosophers John Rawls and Thomas Nagel and the economist/philosopher Amartya Sen), Phelps values creativity and innovation not just on the grounds of productivity but because of their value to human well-being more broadly. “For an ever-increasing number of people in the modern economies,” he writes, “continued growth of their wage rates and salaries is not among the most important things in their lives.” What then do people value? For Phelps, the essence of human nature is “a desire to express creativity, a relish for challenge, an enjoyment of problem solving, a delight in novelty, and the restless need to explore and to tinker.” Taking a phrase from Aristotle, this is what he calls “the good life.” It is what he means by “flourishing.”

And this is precisely why Phelps thinks modern capitalism matters. From its beginnings in the mid-nineteenth century, he argues, the modern capitalist economy “altered human experience by enlisting creativity, inviting experimentation, and fostering innovation,” and on this account it “earned its place as a watershed development in world history.” “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…. It turns all sorts of people into ‘idea-men.’” In short, the modern capitalist economy is “a vast imaginarium.” And because our use of the imagination is central to what “the good life” is all about, “a modern economy, when functioning well and justly, is tailor-made to produce the flourishing and personal growth that are at the core of the good life.”

Moreover, again in the spirit of FDR and now of Smith as well, Phelps’s concern for this kind of “flourishing”—and therefore his enthusiastic endorsement of modern capitalism—is deeply democratic. In a modern capitalist economy, he argues, everyday work for ordinary citizens provides “the experience of engagement, personal growth, and fulfillment.” It does so because of “the endless succession of new problems” that “keep their work challenging”—and not just for some elite: “In an economy of dynamism, some portion of most participants’ time is spent looking at current practice with the expectation that a new idea will occur for a better way to do things or a better thing to produce” (my italics). “Every company or participant is like a forward observer, or scout ant,” he writes. “In the modern economy, careers almost force participants on a winding voyage of exploration.” Indeed, “a modern-capitalist economy is outstanding in the prospects it offers ordinary people for the good life” (my italics). Phelps admires modern capitalism because it provides not just flourishing but mass flourishing.

But Phelps’s book, while a paean to the possibilities of capitalism, is far from optimistic. The Western economies, he claims, including that of the United States, have lost their dynamism and hence no longer meet the conditions of modern capitalism as he defines it. In America the dynamism essential to modern capitalism ended approximately in the 1970s. In Europe and Japan, which never had much creative capacity to begin with but rather relied on innovations pioneered and developed in the US, the end of dynamism in America meant the end there too. The result is the pervasive slowing of economic growth that has attracted so much attention in recent decades, and still does. Here too, however, Phelps’s focus is on the nonmaterial dimension of life. Today, he laments, “There is no longer in America or in Europe [even] a sense of what mass flourishing was like.” “The rich experience of working and living in such an economy” is gone.

Phelps’s explanation in part agrees with the standard literature seeking to explain the slowing of American and European economic growth, but the emphasis is different and so too is his interpretation. Many of the now familiar elements of this story are present in his account: bloated corporate bureaucracy and the ever-increasing focus on the next quarter’s earnings; the progressive shift of stock ownership to mutual funds, which rarely challenge managements on matters of long-term business strategy; a mania for speculation and mergers on the part of banks newly empowered by the collapse and then formal repeal of the Glass–Steagall Act that once separated banking from the investment business (“the banking industry betrayed the very concept of a modern economy”); the fixation of America’s economic elites on making money for its own sake (“wealth seeking competes with innovation seeking”); the parallel rise of “a culture of self importance or entitlement”; ever greater polarization of America’s politics; and the expansion of the social welfare state.

But Phelps’s main concern goes beyond this standard dirty-laundry list. He thinks America has succumbed to a “new corporatism” in which large, established business firms enlist the government’s help to block economic innovation in order to preserve their existing position and advantage. This new “corporatist complex between the government and the private sector” stifles competition through a combination of subsidies to the already-dominant firms and impediments to aspiring competitors. Specific forms of this new corporatism include excessively protective patent laws and a variety of regulations that enable those who got there first to shut out new innovators, together with subsidies of all kinds, including farm subsidies and the subsidies to finance that had an ultimately disastrous part in leading to the housing and mortgage debacle of the last decade. Phelps also refers to a “congressional-banking complex” in which “banks and political interests have entered into new arrangements for their mutual benefit”:

The explosion of corporate welfare, self-serving regulations and deregulations, and a sea of social insurance have all depended on a willingness or eagerness on the part of government officials and legislators to protect vested interest and to cater to special interests in return for electoral support and financial support. It is a system of interlocking parts.

The end result is that “the economic performance of the economies that had so recently been exemplars of modern capitalism has recently been disastrous.” In America, “The economy seems to be moving to a frozen state.”

But Phelps makes it clear that economic policies, like other social institutions, do not simply materialize on their own. They represent the “values,” collectively the “culture,” of the society itself, and here is his most fundamental concern. Phelps believes that the “modern values” that gave rise to modern capitalism—“thinking and working for yourself,” “readiness to accept change caused or desired by others,” “the desire to test one’s self against others,” “the willingness to take the initiative,” “the welcoming of hurdles to surmount,” “the desire to be intellectually engaged”—are in retreat. Moreover, in what will be a surprise to many politically and socially conservative readers, who up to this point will have nodded in agreement all through the argument, what these modern values are so disastrously retreating in the face of is “a resurgence of traditional values” and “a new attention to family values.”

What, then, is to be done? Phelps’s goal is clear: “enlisting the imagination and energy of participants [in the economy] from the grassroots on up…engag[ing] the mind and seiz[ing] the imagination of participants down to draftsmen, day laborers, farmers, traders, and factory workers.” The democratic spirit, the value placed on inclusion, the concern for everyday Americans who make up the bulk of the country’s workforce, are a large part of what makes his argument appealing.

To achieve these ends, Phelps would recruit more people to government who have had practical experience innovating in business. He would shrink corporate welfare and repeal anticompetitive regulation. He would “stop the corporate practice of paying CEOs very high salaries over a term expected to be very short,” and ban “golden parachute payments.” He would reform mutual funds. He would revive “old-fashioned…‘relational banking’” and “restructur[e] the banking behemoths of the present day into smaller units with much less latitude.” Above all, he would “strengthen the modern values” that used to lie behind America’s modern capitalist economy, in the first instance by “reintroducing” into secondary and higher education concepts like individualism, which he sees as having been replaced by assignments “aimed more at communicating feeling and compassion.”

What is not on Phelps’s list is noteworthy too. He of course believes in both personal and economic freedom. But “America is unlikely to recover the dynamism and resulting prosperity it had up to the 1970s as long as it operates on the belief that freedom is sufficient to do so, and that freedom can always be dialed up by a downward adjustment of tax rates.” Further, “Not all freedoms are good for dynamism.”

All of these proposed changes are worthwhile, at least at the level of abstraction at which Phelps, in this book writing as much as a philosopher as an economist, offers them. (In matters like reforming corporations and mutual funds and banks, the debate is usually over the more specific substance, even the details; in arguments over school curriculum it is even more so.) If his book were simply about economic growth, these steps would be plausible entries on the policy agenda of anyone without a vested interest in the status quo (such as the bankers and corporate CEOs he so harshly criticizes).

Phelps’s objective, however, is not economic growth per se but mass flourishing—that is, delivering the good life, centered on the exercise of creativity and intellectual stimulation, to the broadest possible swath of the working population. And there his program is open to question.

To begin at the beginning, saying what constitutes “the good life,” not just for oneself but for men and women generally, is inherently problematic. In response to the emergence of sustained rapid productivity growth in the early nineteenth century, the future-oriented utopian socialists who proliferated at midcentury mostly supposed that people would devote their freed-up time to activities like gathering to read plays. Among the pursuits that real people turned out to prefer instead, as the work week continued to shrink, the utopians forgot about gambling and engaging in sports, and they never imagined the opportunities modern telecommunications would open up for watching other people engage in sports. Phelps may be right that what most people want in life, and find satisfying when they find it, is the challenge of creativity at work. But this is mostly a philosophical assumption.

The greater problem is Phelps’s further assumption that with the changes he advocates—indeed, under any plausible set of conditions at all—the broadly democratic, inclusive character he envisions for economic creativity can be a reality. The point of his argument for what he calls “modern capitalism” is not the importance of creativity and innovation in improving the material living standards that the majority of citizens enjoy as consumers; rather he emphasizes the moral value of creativity and innovation in what the majority of citizens do as workers.

As a historical matter, it is not obvious, and Phelps provides little evidence, that the American economy ever provided such opportunities on the broad basis he envisions, even during the century-plus before the 1970s that he hails as its great era of modern capitalist success. To be sure, many people during that era did face challenges, and solve problems, and devise new methods, and even invent new products in the course of their everyday work; and many of those started out as ordinary workers. Carnegie and Edison and the Wright brothers and Alexander Graham Bell are all part of American history and legend. But the percentage of 1880s steel mill workers, or 1920s shop clerks, or 1950s waitresses and automobile salesmen who fulfilled this aspiration (assuming it was what they aspired to) is not known. Nor is it obvious that the percentage then was actually greater than it is today.

One clue to Phelps’s reason for thinking that the economy did once provide such broad opportunities lies in his discussion of the kinds of work that do or do not provide the opportunity for creativity. In contrast to work of the modern capitalist kind, which he takes to provide ample opportunity for creativity and innovation, he also considers “priests, ministers, rabbis,” “caregivers in a nursing home or a hospice,” “positions in nonprofit organizations aimed at a cause, such as the environment,” and other “work in an organization where the individual’s own benefit is not the objective”—in short, anything not in the economy’s for-profit sector. “In these lines of work,” he states, “there is relatively little prospect, if any, of experiencing exploration or creation.” Creativity is limited to the for-profit sector.

This claim—not that such jobs add less economic value than those in the for-profit sector (which may or may not be true), but that they are devoid of opportunities for creativity and problem-solving—is astonishing. Is it true that nurses face fewer on-the-job challenges requiring solutions than do waitresses and secretaries and call-center operators? Or that someone devising legislative strategies at the Sierra Club has less opportunity for creativity than an opponent on the lobbying staff of Peabody Coal? What of the foundation-funded research scientist looking for a way to produce energy with less pollution? What about teachers? Would it matter whether the school is a public school or private? Or if it’s private, whether it’s for profit or not? (Phelps teaches at Columbia and I’m at Harvard. Would we have more opportunity for creativity at the for-profit University of Phoenix?)

If the question at issue were whether those who work in organizations not driven by the profit motive have less chance of being an innovator like Bill Gates or Steve Jobs or Sergey Brin, Phelps’s bias would perhaps be more understandable. But that is not the question he’s asking. His argument is about the mass of workers, not the elite. It may be true that intellectual challenge and the opportunity for creativity are, or could be, part of the everyday working life of ordinary people working in business firms in ways that they are not, and cannot be, for those working in government or private not-for-profit organizations. But establishing that proposition would require both argument and evidence that Phelps does not provide. It is certainly not obvious on its face.

A parallel concern surrounds Phelps’s policy recommendations. Restructuring America’s banks, reforming executive pay and other elements of corporate governance, and improving the curriculum of US education (whether in Phelps’s suggested direction or not) should be on every American’s action list for the coming decade. Doing so would surely contribute—no one knows by how much—to the economy’s ability to grow and to improve citizens’ living standards. But whether these steps would create (or as Phelps believes, recreate) an economy in which intellectual challenge and the opportunity for creativity and innovation are pervasive throughout the work force is dubious.

In The Cultural Contradictions of Capitalism, published in 1976, the great American sociologist Daniel Bell predicted that capitalism would undermine itself, not by failing but by succeeding. Writing just at the time when Phelps argues that the American economy began to lose its “dynamism,” Bell followed Max Weber in believing that an identifiable set of cultural values underlay capitalism’s early development and subsequent success. But, he argued, over time the rising incomes and improving living standards that this novel way of organizing economic activity delivered would inevitably change the objective circumstances on which those values in turn depended. As the society grew richer, the importance attached to further gains in material living standards would diminish while other, nonmaterial aspirations would assume ever greater priority. As a result, willingness to sacrifice the latter for the former would erode, and, in time, so too would capitalism.

The phenomenon lamented in Phelps’s Mass Flourishing, nearly forty years later, is a realization of what Bell envisioned. Looking backward, Phelps sees “modern capitalism” as having eroded since the 1970s. And as Bell anticipated, he attributes this deterioration to a weakening of the values on which modern capitalism depended. Unlike Bell, Phelps takes the society’s values—its “economic culture”—as the starting point of the causal chain. If Bell was right, however, these changing values are themselves the result of capitalism’s success up to the time (the 1970s) when Phelps sees its deterioration as having set in. The interaction between the society’s values and its economy has followed its own internal dynamic.

Because he mourns the passing of “modern capitalism” not for its material benefits but rather for the moral value of creative and innovative work it provided, Phelps gives a rationale for seeking to reverse this dynamic.⁴ Further, he sees the problem as due not just to changing economic values, as living standards have risen, but to the perverse ability of large business firms and other interests to protect their existing economic advantage by capturing government. His argument therefore presents the possibility of both philosophical and practical routes to reversing the dynamic that Bell predicted.

If Phelps is right that people value the opportunities for creativity and innovation that a healthy “modern capitalist” economy offers, and right, too, that modern capitalism provides these opportunities on the widespread, inclusive basis that he claims, making all this known may alert citizens to what they have sacrificed. And if he is right that the “new corporatism” is the mechanism by which these opportunities have been lost, the policy proposals he presents, and others like them, offer the hope of regaining them.

Phelps’s image of the democratic, inclusive character of “modern capitalism” is probably romantic, and it may prove unrealistic. But he shows why it is worth fighting for.