Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change Movement by Edmund Phelps (Princeton University Press 2013), 392 pages.
Nobel Laureate Edmund Phelps evaluates economic systems with a view to how they promote human prosperity, or “flourishing”:
engagement, meeting challenges, self-expression, and personal growth…. A person’s flourishing comes from the experience of the new: new situations, new problems, new insights, and new ideas to develop and share. Similarly, prosperity on a national scale — mass flourishing — comes from broad involvement of people in the process of innovation — the conception, development, and spread of new methods and products — indigenous innovation down to the grassroots.
All this equates, roughly speaking, to what thinkers such as Abraham Maslow and John Rawls call “self-realization.”
Reading Phelps’s description of flourishing and grassroots involvement in innovation, the first thing I thought of was the peer-to-peer economy, and the personality traits associated with McKenzie Wark’s (A Hacker Manifesto) “hacker ethos.” And I was half-hoping for a book on that theme, on the basis of the blurb at Amazon (innovation “was driven by millions of people empowered to think of, develop, and market innumerable new products and processes, and improvements to existing ones”). I came in expecting to read a book focusing on the Hayekian distributed knowledge of ordinary production workers.
I was sadly disappointed. In fairness, Phelps does start out by rejecting Joseph Schumpeter’s association of innovation with capital-intensiveness and institutional size — “increasing stock of capital” and “economies of scale” — which is good. And he generally promotes the role of human capital in innovation at the expense of such factors. But that’s about where the positive aspect of this book ends.
The role of the state
Phelps sums up the background conditions that contribute to his goal of human flourishing as “dynamism.” And the economic system, cultural values, and institutions most closely associated with his idea of dynamism are what he calls “modernism” or “modern economies.” “Modern capitalism” or “modern economies” are the economic model that first appeared in Britain, the United States, and Germany in the mid 19th century, and persisted through the mid 20th century (especially under the American model of mass-production corporate capitalism). I got something of a sense of déjà vu reading this, because it reminded me almost exactly of the Whig values Rich Lowry praised in Lincoln Unbound, which I reviewed in the March 2014 issue of Future of Freedom, values promoting hustle and bustle, driving everyone into the modern cash nexus whether they wanted it or not. Phelps’s “modernism” is basically the ideology of Hank Morgan in Mark Twain’s Connecticut Yankee in King Arthur’s Court.
To his ideal of 20th-century hustle-and-bustle American capitalism, Phelps contrasts what he calls “socialism” and “corporatism.”
Phelps is almost totally oblivious to the central role of the state, in alliance with capital, in creating — and maintaining — the structural preconditions for what he calls the modern economy. He focuses almost entirely on the positive liberatory aspects of the societies in which modern capitalism first emerged: the “emancipation of women” and “abolition of slavery.” But he ignores the extent to which this liberation — as Karl Marx impolitely pointed out in the section of Capital on primitive accumulation — was a two-edged sword. The laboring classes of Britain were liberated from serfdom, true enough. But hand-in-hand with that went a “liberation” from their previous customary rights of access to the land. The English peasantry were “freed” from their property rights first in the open fields, and then in access to common waste and pasture, together constituting most of the useful land — robbed of them, as we would say in more straightforward language — and, having been transformed into a propertyless proletariat, driven into the wage-labor market as their only alternative to starvation.
Forcibly separating the majority of people from their property in the means of self-employment and subsistence wasn’t enough. In the formative years of the Industrial Revolution — through the immediate aftermath of the Napoleonic Wars — the working classes of Great Britain were subject to what amounted to totalitarian controls on their movement and association. The Laws of Settlement were nothing short of an internal passport system that prevented paupers from leaving the parish of their birth in search of employment opportunities, without permission from the Poor Law authorities. And where that immobility of labor was an inconvenience for employers — i.e., for those in labor-poor areas of the industrializing North — the Poor Law authorities in overpopulated London parishes came to the rescue by auctioning off surplus labor from the poorhouses to be transported by the gross for employment on whatever terms the mill owners offered.
The Second Industrial Revolution of the late 19th century — which centered on the integration of electrical power into production — was diverted into the 20th-century mass-production pattern almost entirely as the result of top-down state intervention in the economy. State interventions such as the railroad land grants (and their successors, the state-built civil aviation and interstate highway systems of the mid 20th century), state-enforced cartels resulting from the pooling and exchange of patents, and state regulatory cartels (such as the Securities and Exchange Commission Act with its restrictions on price competition) were central to the model of mass-production oligopoly capitalism that predominated through the 20th century.
And that’s only the domestic side of it. We haven’t even considered the role of colonialism and conquest in concentrating world commerce under the control of a handful of Western powers, the massive enclosures and evictions, enslavement, and appropriation and extraction of mineral resources — the structural effects of all of which, including the continued concentration of farmland and natural resources in the hands of the original expropriators, persist to the present day.
In short, what Phelps calls “modern capitalism” lives, moves, and has its very being in the state.
Hidden knowledge
The indigenous grassroots innovation Phelps celebrates, the joys of discovery and overcoming and self-realization through one’s work, were never available to any but a few under his “modern capitalism.” And indeed, Phelps himself focuses almost entirely on entrepreneurs and venture capitalists. For those who work for a wage, the “dynamism” lies entirely in the exhilaration of looking for new cheese after the old has been moved: hunting for a new job and learning challenging new skills when one’s old ones are made obsolete, or, at best, in the rewarding process of submitting an idea to the employee suggestion box.
It’s downright comical, in a book that purports to be about distributed knowledge and “grassroots innovation,” to see Phelps dismiss the performance of worker cooperatives and self-management in one throwaway sentence. There’s a vast body of literature on the performance of worker cooperatives, and on the way the structure of ownership and incentives in the firm affect workers’ contribution to innovation and output — but what would anything like that have to do with a book on dynamism and innovation?
According to economists Sanford Grossman and Oliver Hart, the most important way to elicit the distributed or hidden knowledge of one’s workforce, to get them to invest their human capital in the productivity of the organization, is to distribute decision-making authority and compensation — i.e., the basic incidents of residual claimancy — to stakeholders in accordance with their contribution to the output and equity of the organization. When the distributed knowledge or human capital of workers is the main source of increased efficiencies and value in a firm, but their contribution is not reflected by a property right in the output, they know that their contributions to increased productivity will be expropriated in the form of downsizings, speedups, and management bonuses. As a result, workers will have every incentive to hoard their hidden knowledge and ration their effort, to do the least necessary to get by, the same way they did in the Soviet Union.
Bureaucracy, hierarchy, and work-rules of the sort discussed by Max Weber (who favored standardized bureaucratic job descriptions and work rules) and Frederick Taylor (who favored making skilled knowledge unnecessary and minimizing the discretion of individual workers) are expedients for working around the fact that workers’ interests are diametrically opposed to those of management, and workers have every rational incentive in the world to do the bare minimum necessary to avoid getting fired rather than help increase productivity. A maximum of worker decision-making involvement in the production process, and large-scale profit-sharing, are ways to elicit maximum effort and creativity from the workforce. But corporate management prefers a larger slice in absolute terms, even if it comes from a smaller pie.
To argue against the efficiency of worker cooperatives and worker self-management on the basis of their performance in this corporate economy is like arguing against the efficiency of private businesses in the Soviet Union on the basis of their performance against state-owned industry. It ignores — to say the least — the nature of the artificial selective pressures within the ecosystem. Western-style corporate capitalism evolved in the aftermath of the kinds of large-scale expropriation described above, in an environment where property had been artificially concentrated in a few hands. Of necessity, therefore, the dominant organizational forms presumed absentee ownership or hierarchical control, and the need to extract effort from a workforce which gained nothing from working harder.
The large corporation — especially in the heyday of “modern capitalism” — actively sought to suppress the role of its workforce’s distributed, situational knowledge in the production process. As James Scott argued in Seeing Like a State, corporate management — like those in any position of authority — saw the hidden knowledge and skills of their subordinates as a barrier to the extraction of maximum rents, and resorted to de-skilling measures such as Taylorism and machine-controlled work processes as an expedient to maximize the surplus they could extract from labor.
The real dynamism
Phelps’s institutional focus, in seeking to restore dynamism, is almost entirely misplaced. The real grassroots innovation is taking place almost entirely outside the institutional framework of his beloved “modern capitalism.” It’s taking place mainly among small, horizontally organized groups such as open-source software developers and hardware hackers, developing cheap, small-scale, high-tech machines for autonomous production in cooperative shops and peer-to-peer networks.
If anything, the institutions of mid-20th-century capitalism are seeking either to strangle that innovation in its cradle, or to co-opt it into their institutional framework and enclose it as a source of rents.
Phelps’s focus on the “modernist” versus “communitarian” and “traditionalist” axis as the Rosetta Stone for explaining economic history obscures what I consider a much more important polarity: that between “vertical” and “horizontal.” There was a high degree of innovation by skilled tradesmen in the horizontally organized communes of the Free Towns of the Late Middle Ages, as described by Peter Kropotkin, for example. And it was suppressed when the vertically organized state conquered the Free Towns. This large-scale state suppression of horizontal organization, and the wholesale expropriation of peasant land that ensued, might have something to do with the two or three centuries of stagnation Phelps identifies with “premodern capitalism.” He treats the evolution of “commerce” from late medieval times to the modern anonymous cash nexus as much more of a linear progression.
And in attempting to force economic history into his Procrustean explanatory framework of dynamism, he must do a great deal of cutting and stretching to make all the data fit. For example, he goes through prodigious contortions to portray what in many key respects is a stagnation in real wages and decline in job satisfaction since the 1970s as a result of corporatist ideas and reduced dynamism. That ignores a really big elephant in the living room. Phelps’s “modern capitalism” almost died in the 1930s, as a result of a tendency towards overaccumulation and excess-production capacity that had been chronic to the corporate-state model of capitalism created in the late 19th century. World War II rescued corporate capitalism from that crisis by destroying most of the plant and equipment in the world outside the United States, and pushing the reset button for a generation. The crisis of overaccumulation resumed around 1970, when Europe and Japan mostly had rebuilt their industrial base from the World War II destruction. The stagnant wages and reduced satisfaction might, just possibly, have something to do with the neoliberal economic policies and internal corporate authoritarianism adopted by capital in response to the renewed crisis.
To summarize: There’s a great book to be written about the role of the distributed knowledge of ordinary people and grassroots innovation, rather than giant capital-intensive hierarchies, in making life better for everyone. But Edmund Phelps hasn’t written it. The subject matter of that book lies, not in Schumpeter’s model of capitalism or in the one presented by Alfred Chandler in The Visible Hand, but among Linux developers, hackerspaces and Fab Labs, TOR software developers, innovative local currency systems, and neighborhood Perma- culture efforts. Phelps, in positioning himself as the enemy of the Janus-headed corporate state, has inadvertently served instead as an apologist for just another variant of corporate statism.
This article was originally published in the March 2015 edition of Future of Freedom.