The Agenda

Markets Are Magical

Riffing on Megan Garber’s article on Slate’s Fresca Fellowships — while Garber and the New York Observer’s John Koblin both note that the name stems from editor David Plotz’s love of Fresca, neither credits Slate senior editor Josh Levin with coining the phrase — Matt Yglesias offered a useful description of the non-magical yet somehow magical workings of the market:

A point I would make about this is that people sometimes forget that capitalism doesn’t operate by magic. When it comes to a certain form of “hard” technical innovation, people get this. Computers keep getting better and better, but these improvements don’t happen instantaneously—people need to put the time in to figure it out. But when you get to “softer” organizational innovations, the same thing happens. These new computers show up, then someone needs to think up an idea about how to use them better. Then that person typically needs to connect with someone who has money and some confidence in the innovator. Then you have to get the thing up and running. And then you have to see how it turns out. Then if it turns out well, the model will spread. It’s a process that takes some time, especially since the people who initially had experience writing and editing didn’t necessarily have experience with the Internet.

Edmund Phelps has described the virtues of economic dynamism of this kind:

 

But high productivity is not the only element of high performance. The other element is thriving, prospering participants. This requires jobs to be rewarding in more than pecuniary ways – enlisting the minds of employees, engaging them in problem solving, leading them to discover some of their talents and expanding their abilities. This personal growth, while an end in itself, is also a source of job satisfaction, which in turn boosts participation in the labor force, and of high employee loyalty, which lowers unemployment, making more good jobs available.

What is needed for high performance? Basically, it is productive change, which I call economic dynamism . For employees to develop, they must be imbedded in a stimulating workplace, with new problems to solve, harder tasks to be mastered, added abilities to strive for. Less obviously, a country does not want misguided or pointless change; it wants investments that appear to the financial sector as productive.

The irony is that raising productivity in the most advanced economies requires a great deal of “wasted effort.” Economic laggards can mimic the best practices deployed in the leading economies. But the firms on the cutting-edge must engage in a trial-and-error process that inevitably involves a great deal of error.

Phelps is a harsh critics of what he calls Europe’s “corporatism,” but he also argued against the Bush tax cuts in 2001. One of his arguments is particularly intriguing in light of the post-2001 trajectory of global imbalances:

The proposed tax cut will boost the dollar. This real exchange rate appreciation will drive customers at American firms to seek suppliers overseas. As a result, more of overseas saving will take the form of net exports to the US. Less of that saving will be available to finance overseas domestic investment. The US government cannot be expected to stifle a once-in-a-generation boom to make life smoother overseas. It can be asked to refrain from willfully cutting into investment and growth in the rest of the world.

It is certainly true that consumption growth has been severely constrained in many of the world’s leading exporting nations. Though I can’t say I agree with every aspect of Phelps’s analysis, it’s clear that he got a few important things right. 

And Phelps has offered a sweeping critique of existing welfare states in his brilliant 1997 book Rewarding Work, the central themes of which are raised in this short essay. I recommend giving it a look.

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