Edmund Phelps, yesterday's Nobel Prize winner for economics, brings us a soulful, humanistic, and optimistic defense of global capitalism (by way of a history lesson in Western Civ) in an op-ed in today's
Wall Street Journal. A sample:
I would, however, stress a benefit of dynamism that I believe to be far more important. Instituting a high level of dynamism, so that the economy is fired by the new ideas of entrepreneurs, serves to transform the workplace--in the firms developing an innovation and also in the firms dealing with the innovations. The challenges that arise in developing a new idea and in gaining its acceptance in the marketplace provide the workforce with high levels of mental stimulation, problem-solving, employee-engagement and, thus, personal growth. Note that an individual working alone cannot easily create the continual
arrival of new challenges. It "takes a village," preferably the whole society.
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. Today we cannot go tilting at windmills, but we can take on the challenges of a career. If a challenging career is not the main hope for self-realization, what else could be? Even to be a good mother, it helps to have the experience of work outside the home.
I must mention a "derived" benefit from dynamism that flows from its effects on productivity and self-realization. A more innovative economy tends to devote more resources to investing of all kinds--in new employees and customers as well as new office and factory space. And
although this may come about through a shift of resources from the consumer-goods sector, it also comes through the recruitment of new participants to the labor force. Also, the resulting increase of employee-engagement serves to lower quit rates and, hence, to make possible a reduction of the "natural" unemployment rate. Thus, high dynamism tends to bring a pervasive prosperity to the economy on top of the productivity advances and all the self-realization going on. True,
that may not be pronounced every month or year. Just as the creative artist does not create all the time, but rather in episodes and breaks, so the dynamic economy has heightened high-frequency volatility and may go through wide swings. Perhaps this volatility is not only normal but also productive from the point of view of creativity and, ultimately, achievement.
Ahhh. Capitalism makes me happy.
Why is this relevant to our housing discussion? (I'll stretch a bit to tie it back to the topic at hand). The work for which Phelps won The Prize yesterday centers on inflation and monetary policy, which he pioneered with Milton Friedman in the '60s.
Inflation, the cruelest tax. The disturbing fact is that the economy currently has more of it (~4%) than is comfortable (~2%). Unless inflation eases back down over the next three to six months, the Fed is going to be forced to respond with higher interest rates. This rate increase would coincide with a likely slowdown of the economy. Indeed the Fed may be forced to throw us into recession to stop inflation.
This worst-case scenario of higher rates and recession (read:job uncertainty) isn't a guarantee in our opinion. The best case scenario is that inflation fades, the economy bottoms at slow growth in 2Q 2007, and rates are allowed to ease down. In all though, it seems likely that Greenspan's call yesterday of the bottom of the housing market is premature.
So Phelps taught us how to manage inflation. Now in the face of that threat, our housing market may be forced to take the bitter medicine to fix it. Today he illustrates the glorious foundation for optimism - our enterprising society will carry us through in the long run even if the next few years are painful.
