Is China outstripping the West at innovation?
Powerhouse of the future: Shenzhen High-Tech Industrial Park (credit: Brücke-Osteuropa)
Conventional economic theory does a poor job of explaining the growth eruptions that transformed Western Europe during the 19th century and parts of Asia during the late 20th century, the Nobel Laureate Edmund Phelps argued in his 2013 book Mass Flourishing (Princeton, £19.95). Phelps's book drew positive reviews but not enough thoughtful consideration. It challenges many of our prized assumptions about what makes economies succeed.
It is not scientific discovery, nor engineering skill, nor education, nor the astuteness of entrepreneurs that generates economic transformation, Phelps observed, although all of these elements are important. Rather, it is the willingness of the whole of society to plunge into "the topsy-turvy of creation, the frenzy of development" — to pull up stakes and move, to abandon old ways of doing things and try new ones, to abandon the safe harbor of the familiar and embrace novelty.
Phelps is closer in spirit to Paul Johnson's 1991 study The Birth of the Modern than to any of the economic theorists. What he calls "mass flourishing" in contrast to ordinary economic growth stems from a radical change in attitudes and ideas through the whole of society.
"The advent of the modern economy," Phelps writes, "brought a metamorphosis: 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. In a role reversal, scientists and engineers are called in to assist on technical matters. In fact, it turns all sorts of people into ‘idea-men,' financiers into thinkers, producers into marketers, and end-users into pioneers."
Like Paul Johnson, Phelps dates Europe's growth take-off from 1815. The scientific revolution and the Age of Navigation produced no dividends for ordinary folk until modernity enveloped Europe and turned whole societies into innovators. "The modern economies were not the old mercantile economies," Phelps writes, "but something new under the sun."
The living standards of ordinary Europeans in 1800 were not much different from those of Roman or medieval times. But modernity brought "a cornucopia of material benefits", Phelps observes. "By 1870, total domestic output per capita in Western Europe as a whole had risen 63 per cent above its 1820 level. By 1913, there was a further rise of 76 per cent."
What was it about that unprecedented epoch of economic expansion that we have lost in what Phelps calls a "structural slump" in the mature industrial economies? Can we observe a comparable mass flourishing anywhere else in the world today? And can the industrial world accomplish this great transformation once again?
Economic policy, Phelps contends, suffers from bad theory. He disputes "the classic account by Arthur Spiethoff and Joseph Schumpeter of entrepreneurs jumping to make the ‘obvious' innovations suggested by discoveries of ‘scientists and engineers'." 19th-century determinism took economics down the wrong path, he believes: "The two pied pipers, Schumpeter with his scientism and Marx with his historical determinism, profoundly misled historians and the general public."
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