Phelps on Dynamic Capitalism:

"What would be the consequence, from this Rawlsian point of view, of releasing entrepreneurs onto the economy? In the classic case to which Rawls devoted his attention, the lowest score is always that of workers with the lowest wage, whom he called the "least advantaged": Their self-realization lies mostly in marrying, raising children and participating in the community, and it will be greater the higher their wage. So if the increased dynamism created by liberating private entrepreneurs and financiers tends to raise productivity, as I argue--and if that in turn pulls up those bottom wages, or at any rate does not lower them--it is not unjust. Does anyone doubt that the past two centuries of commercial innovations have pulled up wage rates at the low end and everywhere else in the distribution?"


2 responses:


A: "And it appears that the recent street protesters associate business with established wealth; in their minds, giving greater latitude to businesses would increase the privileges of old wealth. By an "entrepreneur" they appear to mean a rich owner of a bank or factory, while for Schumpeter and Knight it meant a newcomer, a parvenu who is an outsider."

But the fact is that such large businesses are currently wildly successful to a degree that gives them power entirely out of proportion to the numbers and kinds of welfare they are designed to serve. The laws that they push forward which are widely regarded as "pro-business", are in fact designed to benefit those who are currently rich at the expense not only of those who are poor but also those who would produce to the benefit of wider society.

The increasingly insane developments of intellectual property rights trends is great evidence of this. There is no obvious, uncontestable definition of "property" in a film or musical recording that makes, for instance, re-recording for a range of forms of personal consumption, or the creation of remixes, or being able to skip advertisements in DVDs of the film, consequences flowing from that film or musical recording that someone involved in artistically creative activity would foresee and take into account when deciding how much and what to produce. The question is purely one of distribution of the wealth of this cultural product -- more to the corporations or more to consumers?

Yet business lobbies insist that tilting distribution in their favour (with the weight of governmental force, mind you) is an incentive to innovation -- that the laws that back up anti-circumvention and turn us from active users into mere consumers are pro-innovation. And perhaps they have a point here, that there is a definite effect of IP protection on future creation. But what kind of effect? If the madness of anti-circumvention is pro-innovation, pro- what kind of innovation? Certainly not the kind of fluid, participative, democratised innovation performed everyday by people who swap and modify one another's works on, say, the Internet (anyone who has ever followed a web comic and seen the great quality of work and the innovations that come from guest strips and cross-fertilisation of ideas will know what I mean). Certainly not innovation in the form of parody and pastiche that can only come when the originators of works don't arrogate to themselves the right to censor so as to protect not their authorial integrity but their commercial brand.

If Phelps were merely arguing that the capitalists have perverted capitalism I could be more sympathetic. But the claim that America's corporatised (the irony, that he should choose to call Western European 'corporatist' instead!) version of capitalism is somehow one that more closely than any other developed country's model approximates the kind of ideals underlying capitalism doesn't, to my mind, pan out. The corporations have the weight of thousands of lawyers and lobbyists on their side, and we lawyers (I'm ashamed to admit) and lobbyists work to alter the terms of every transaction so that the notion of a fair bargain has become entirely illusory in many cases. Giving large businesses free rein is giving them the power to set the terms on which you choose. Democracy -- ideally, the source of restraining laws -- acts as a counterbalance by giving us the means to ensure that -we- set the terms on which they set the terms on which we choose. The (all too sadly increasingly realised) alternative is government by other people's profit motives.

Phelps thinks we should identify "pro-business" laws with laws that are "pro-small-business." A "pro-business" law is never equally pro-big-business and pro-small-business; it's going to favour one or the other. It's pretty crazy that Phelps talks about Western European anti-capitalists having an antipathy toward capitalism that ignores all consequences. It's precisely the hard fact of consequences, aside from all pretty theory, on which laws that restrict the ability of large businesses to do as they like with impunity are founded.


B: "The system operates to discourage changes such as relocations and the entry of new firms, and its performance depends on established companies in cooperation with local and national banks. What it lacks in flexibility it tries to compensate for with technological sophistication. So different is this system that it has its own name: the "social market economy" in Germany, "social democracy" in France and "concertazione" in Italy ."

Given that the world is growing increasingly interconnected, Phelp's apparent assumption that there is an objective characteristic of "capitalist" or "non-capitalist", that can be used to describe any particular country, is problematic. One thing that you'll realise when you look at the so-called "capitalist" countries the world over is that they vary widely. Not just within the bounds of "monopolies too big to break up, cartels... etc" but also the influence of the multinational corporation. The beauty, and the tragedy, of the efficiency in a world which increasingly promotes free trade, is that any large corporation has a disproportionately large influence in where it chooses to invest. When countries such as the USA experience "increased productivity growth" that allow its lowest paid workers to choose other, ostensibly more fulfilling, jobs (such as data entry possibly), other countries such as India have workers which enter into these markets. Such is the beauty of outsourcing.

Free trade enthusiasts would argue that these jobs created would be a step up from what these individuals were doing in the past, and make them better off. Two criticisms are pertinent here however. Firstly, it makes the assumption that a better paid job makes a person better off, which Phelps criticizes in his essay; Second, it ignores the fact that in moving these jobs into a developing country, a multinational corporation does not only save on cost, ceteris paribus, but in many cases, also saves on a multitude of other factors - minimum working conditions, union protection and the cost of firing and hiring are just a few examples. The quality of the jobs held therefore, would seem to be different. This is not to say that the overall effect is not positive, but it is far more complex than what Phelps would seem to argue, and is not clearly positive in the way he makes it out to be.

An extension of this point is relevant to A's observation about multinational firms and intellectual property. One of the first things that you will come across when you study market failures is that companies have a concentrated gain from organizing and lobbying to forward legislation that is in their interest - in this case, intellectual property law. By contrast, individuals, who benefit from competing legislation, have far fewer resources and organizational capability. All other things remaining equal, as A points out, the companies win. In the international sphere, this is analogous. Multinational corporations have a concentrated gain in forwarding international legislation that is in their interest; in the international community, organizing becomes even more difficult. Witness the broadcaster-weighted proposals in the World Intellectual Property Office (WIPO), where broadcasters are close to securing ability to unrestrictedly use orphan works, and retain the rights to them for 20 years.

These forces work directly against the so-called "dynamic" forces of capitalism, that Phelps emphasizes in his essay. Intellectual property was arguably designed to safeguard innovation and indeed promote it, by offering individuals an economic incentive to innovate. In a simplified conception, it consists of access and protection elements - protection which safeguards an individual's innovation, whether in the form of copyright or a patent, or access, which allows individuals to create derivative works which are potentially just as valuable, or even more.

The unequal forces mentioned two paragraphs back skews laws toward the protection element, which often favours the incumbent, as they have the most invested in intellectual property, and are the most able to legislate against its trespass. It would seem that the large firm, a by-product of the capitalist system, is in fact eating away at one of it's foundations - the access to information that allows dynamism to continue.