Phelps on Capitalism

Strike the iron while it's hot. Ned Phelps, announced yesterday as this year's winner of Nobel prize in economics, writes on capitalism in today's WSJ. In the name of an 'extended' Rawlsian social welfare model, he defends the free capitalism first on the ground of improving the well-being of those at economic bottom, and then of not depriving the creative freedom of entrepreneurs. This is quite an interesting take and it makes some sense to me, but I tend to disagree with his implication that the second justification is as important as the first one.

The concept that people need problem-solving and intellectual development originates in Europe: There is the classical Aristotle, who writes of the "development of talents"; later the Renaissance figure Cellini, who jubilates in achievement; and Cervantes, who evokes vitality and challenge. In the 20th century, Alfred Marshall observed that the job is in the worker's thoughts for most of the day. And Gunnar Myrdal wrote in 1933 that the time will soon come when more satisfaction derives from the job than from consuming. The American application of this Aristotelian perspective is the thesis that most, if not all, of such self-realization in modern societies can come only from a career....

We all feel good to see people freed to pursue their dreams. Yet Hayek and Ayn Rand went too far in taking such freedom to be an absolute, the consequences be damned. In judging whether a nation's economic system is acceptable, its consequences for the prospects of the realization of people's dreams matter, too. Since the economy is a system in which people interact, the endeavors of some may damage the prospects of others. So a persuasive justification of well-functioning capitalism must be grounded on its all its consequences, not just those called freedoms.

To argue that the consequences of capitalism are just requires some conception of economic justice. I broadly subscribe to the conception of economic justice in the work by John Rawls. In any organization of the economy, the participants will score unequally in how far they manage to go in their personal growth. An organization that leaves the bottom score lower than it would be under another feasible organization is unjust. So a new organization that raised the scores of some, though at the expense of reducing scores at the bottom, would not be justified. Yet a high score is just if it does not hurt others. "Envy is the vice of mankind," said Kant, whom Rawls greatly dmired.

...[S]uppose the wage of the lowest- paid workers was foreseen to be reduced over the entire future by innovations conceived by entrepreneurs. Are those whose dream is to find personal development through a career as an entrepreneur not to be permitted to pursue their dream? To respond, we have to go outside Rawls's classical model, in which work is all about money. In an economy in which entrepreneurs are forbidden to pursue their self-realization, they have the bottom scores in self-realization -- no matter if they take paying jobs instead -- and that counts whether or not they were born the "least advantaged." So even if their activities did come at the expense of the lowest-paid workers, Rawlsian justice in this extended sense requires that entrepreneurs be accorded enough opportunity to raise their self-realization score up to the level of the lowest-paid workers -- and higher, of course, if workers are not damaged by support for entrepreneurship. In this case, too, then, the introduction of entrepreneurial dynamism serves to raise Rawls's bottom scores.

I conclude that capitalism is justified -- normally by the expectable benefits to the lowest-paid workers but, failing that, by the injustice of depriving entrepreneurial types (as well as other creative people) of opportunities for their self-expression.

This article argues more from a philosophical than an economic point of view. I think at issue here is his belief that "more satisfaction derives from the job than from consuming". This is a very bold statement and how much it is true for an average person is highly debatable. For a deep and rich thinker like Phelps himself, I am positive that he gets more satisfication from publishing a highly influencial paper than from a nice car or house, more from the recognition of Noble award than the actual $1.3 million prize. But that's him, I doubt this is the case for a creative entrepreneur who dreams up to make a fortune.

This is a well-written and stimulating piece of work nonetheless. I also get a taste of his complex and sometime hard-to-pin-down style of writing, I am sure we will see more of his works in the future.