It is broadly agreed that some form of market economy is necessary to attain minimum levels of productivity which are the sine qua non of general well-being. Improved well-being comes from improved productivity. Improved productivity, in a closed system, comes from improved innovation, finding better ways of doing things, either through better technology, better processes, or better human capital.
But where does innovation come from? Phelps casts his net wide and the entire paper (and his associated book) are not easily summarized. Here is a taste of the discussion.
The modern capitalist system offers the latitude to innovate, the capacity to do so and, above all, the desire.An important topic.
For high dynamism, a nation – its families, communities and public offices – must give individuals and their companies the latitude and support they need if they are to attempt and to achieve innovation. There is little leeway for innovation if society is unwilling to put up with the “creative destruction” – even the mild disruption or inconvenience – that may accompany it. And there is wide latitude for the innovator where mayors and other public officials are eager to facilitate start-ups and help them with their development. Patent trolls and a climate of litigation pose daunting hazards for start-ups aiming to innovate. Corporatism comes in here: A dogma of a corporatist society is “solidarity.” It calls for providing “social protection” of the myriad interest groups in the economy. So the government might defend the workers or investors in industries by regulating entry with the purpose of barring outsiders with new ideas. In some industries, companies may operate a cartel that removes incentives to innovate in order to gain market share. Solidarity also requires the gains of enterprises, whether from a change of market conditions or a successful innovation, to be shared with so-called stakeholders. So any enterprise contemplating an attempt at innovation would expect that a substantial profit would be largely turned over to the community or to the state.
For a nation’s economy to have the capacity to innovate many capabilities must be acquired. Innovators must cultivate the required talent, obtain the required acumen, or insightfulness, and develop the needed passion. It is widely said that innovators in any field tend to be people who have been brought up by parents and teachers to question beliefs and think “outside the box.” A business orientation is generally required as well. Entrepreneurs generally have to feel they have some special insight or some unique intuition into the business to warrant attempting an innovation. To be successful, financiers must have developed the ability to judge uncommonly well every innovative project pitched to them and the pitcher – the aspiring innovator – even though they are far from having a full knowledge of how the new thing will be received. Innovators must also possess the aspiration, determination and self-belief necessary to undertake something that is apt to prove very hard. Like the heroes of myth, innovators are too determined to think much about “risk” or to need “courage.”
At the heart of a nation’s system for high dynamism are people with the desire or occasional urge to innovate. Some may have motivations found among entrepreneurs, such as a need to succeed or to strike it rich. Some others, however, may want to make a difference or show they can go their own way. Some are driven by a curiosity to see whether their insights prove right. Still others are motivated by a desire to give something to their community or society. (Obviously the latter attitudes or traits are not the work-and-save mentality of mercantile capitalism.) I would add that, although a person’s desire to innovate may be inborn to a degree, it can be boosted by supportive attitudes of parents and teachers; and it can be repressed by unwelcoming or hostile attitudes toward creativity or novelty. Furthermore, businesspeople will have more desire to innovate in a nation that admires such ventures and provides workforces that will be engaged in the project and want to contribute. These same desires can also be inhibited by repressive attitudes in families and communities.
The empirical effects of attitudes and traits on the dynamism of nations have been the subject of much recent research. The paper I presented at the 2006 Conference of the Center on Capitalism and Society in Venice tested the statistical significance of several attitudes reported in the World Values Surveys, and it presented estimates of the efficacy of these attitudes. Economies exhibit better performance in nations in which more people regard work as important to them, want to have some initiative at work, seek jobs that are interesting, express acceptance of competition, and prefer “new ideas” to old ones. These results, which do not address innovation in particular, at least leave open the possibility that innovation is affected by these attitudes. A subsequent study by Gylfi Zoega also using WVS data found that the possession of a good “work ethic”, initiative, and trust of others raises job satisfaction; and these attitudes also affect a nation’s unemployment and labor force participation. Finally, in a study with Raicho Bojilov in 2012, I found that job satisfaction is higher – very likely because innovation is stronger or more widespread – in nations where more people think it is fair to pay more to the more productive, agree that the direction of firms is best left to the owners and feel that new ideas may be worth developing and testing. The study found that performance is worse in nations where certain “traditional” attitudes are strong.
Tomothy Taylor's review of Phelps' book.