What's wrong with Western Economies and economics - Edmund Phelps, Nobel Laureate in Economics

[Togo]

In the current New York Review of Books, Nobel Laureate Edmund Phelps has an interesting essay titled "What Is Wrong with the West’s Economies?" (source: http://www.nybooks.com/articles/archives/2015/aug/13/what-wrong-wests-economies/).

In it, he argues that Western economies have generally failed at "inclusion" (defined as "access to jobs offering work and pay that provide self-respect"). He goes on to write


He goes onto the notion of "flourishing"( defined as "using one’s imagination, exercising one’s creativity, taking fascinating journeys into the unknown, and acting on the world"),and how current Western economies act to deter such human activity.

The essay ends with


Phelps is not some "leftist" ideologue, but a well-known and very accomplished mainstream economist. His ideas in the essay are thought provoking and well-worth the read. His demarcation that economics is about efficiency is something all competent and honest economists understand and try to practice.

So he acknowledges that economics is about efficiency. If it isn't about efficiency, it isn't economics. What he has here is political theory or perhaps social theory.

No, it's about efficient use of resources, in this case, human capital.

It's been quite an important point on the international scene, particularly with the rise of the Far East, and the desire to climb the value chain. You can't make money doing simple assembly jobs any more. The sports accessory and plastic toy makers are moving out to places with lower labour costs, and they want to get in design, innovation and planning work. The Singaporean government has been looking at this problem for a while, since they have the problem of a very low rate of company start-ups - their graduates tend to work for large foreign owned corporations rather than start up their own businesses. The only way out of an escalating rate of automation is to do tasks that can't be easily automated, which tends to mean jobs involving innovation, planning for the unknown, or human contact.

To put that into economics terms, the price of human capabilities is going up (or more properly the cost of everything else is trending down). Favouring efficient development of human capabilities and using the full range of your population's abilities, rather than just a small percentage of elites, is an efficiency, just as cheaper oil is. Or to put it another way, spending money on ensuring human flourishing is a bit like spending money to increase the efficiency of power generation. You can see that as a change in macro-economics, from a focus on making available capital to a focus on developing potential. Or you can see it as a part of the classic economic models, just emphasising that human flourishing is going to be increasingly a)necessary for competitive success and b)scarce, which will mean it will become more expensive, and put economies where it is in short supply at a disadvantage.