Parrots in the wild don't speak English

Take a parrot, domesticate it, keep it fed and pay attention to it, and it will learn to talk. Leave a parrot in the wild, and it will forever be more concerned with survival than with learning to talk.


Thoma links to The Three Revolutions Economics Needs by Edmund S. Phelps.

Good title. In passing, Phelps mentions the neglect of imperfect knowledge and the neglect of imperfect information, but his article is really about the third of his three revolutions: "omission from economic theory of economic dynamism."

Not sure what economic dynamism is; I looked it up, and it seems to be the force that drives change (or some such thing). I'm thinkin Phelps wants economists to figure out what drives change so they can restore dynamism. He writes:

While economists have come to recognize that the West has suffered a massive slowdown, most of them offer no explanation for it. Others ... infer that the torrent of discoveries by scientists and explorers has shrunk to a trickle in recent times.

The torrent of discoveries has slowed to a trickle? The one explanation that Phelps allows is surely not a good one.

He says also:

... economists have been largely mute on the underlying causes of this crisis and what, if anything, can be done to restore economic vigor.

Phelps has something in mind, something he thinks would restore the vigor. He makes his whole argument in a single paragraph, framed between two sentences:

Schumpeter’s theory operated on the explicit premise that the mass of people in the economy lack inventiveness.

This was an extraordinary premise. One can argue that the West as we know it – the modern world, we might say – began with the great scholar Pico della Mirandola, who argued that all mankind possesses creativity. And the concerns of many other thinkers – the ambitiousness of Cellini, the individualism of Luther, the vitalism of Cervantes, and the personal growth of Montaigne – stirred people to use their creativity. Later, Hume stressed the need for imagination, and Kierkegaard emphasized acceptance of the unknown. Nineteenth-century philosophers such as William James, Friedrich Nietzsche, and Henri Bergson embraced uncertainty and relished the new.

As they reached a critical mass, these values produced indigenous innovation throughout the labor force.

So, over the centuries, our culture developed a habit of "indigenous innovation".

Yeah, I dunno. I like the phrase. Not so hot on the argument. To me, it's not even economics. I know, I know: Economic activity arises from people. (That's the whole argument for "microfoundations", isn't it?) But to me -- and I'll admit this is small-minded -- to me, it's human nature. It's just the way people are. Okay, maybe it's just the way people are for those who have been breast-fed by Western Civilization. But Japan? Korea? China? Surely the people of those nations didn't grow up with Cervantes and Kierkegaard and Nietzsche and Hume. So I have my doubts about Phelps's theory. But there is something else. Phelps leaves it out entirely.

What is the likelihood that we've lost the cultural gene for "indigenous innovation"? Little or no chance, I'd say. Surely I'm not the only one who has thought up a better way to accomplish some work-related task, but our ideas went nowhere because our next thought was I don't get no respect.

We didn't lose the innovation gene. We are simply withholding our good ideas because we don't get rightly paid for them. To an outside observer like Phelps it would appear that we've lost the innovation gene. We know better. We're like parrots learning not to learn English.

I've done my share of trying to innovate at work. I may have been the main reason they once put up a sign by the time clock:

IF YOU HAVE ANY GOOD IDEAS, TURN THEM IN BY TUESDAY

After Tuesday, in other words, good ideas will no longer be accepted. Maybe Edmund Phelps should focus a little more on things like that. It's not that we've lost the innovation gene. It's that innovation is being suppressed because, god knows, the employer is now so far above the employee that it's obvious (to the employer) that the employee has nothing to contribute, nothing but menial labor.

Well that brings inequality into the mix, doesn't it. Not my topic. But I will tell one more true story: Saw somethin in the shop that I thought was a problem. Went to the boss and told him about it. (It had to do with inconsistent bolt lengths.) The boss listened politely, and when I was done, he very politely said

Thank you for bringing this to our attention.

I looked around to see who else was in the room. Just me and the boss. His message was clear: I was not part of the same "us" that he is part of. And that was the end of that.

That was also when I started withholding my ideas. But that's definitely not my topic here.

My topic is this: Maybe it's not that we've lost the innovation gene, nor that it has been suppressed. Consider the possibility that something else in the economy has arisen or developed or changed, something that interferes with growth or innovation or vigor.

Consider the possibility that innovation is as strong as ever, but some other factor is interfering with the growth that Phelps expects to arise therefrom.

Edmund Phelps never brings up the possibility of such a factor. He does not look for such a factor. And, of course, he never finds one. This does not mean that there is no such factor.


The economist's task is not to find what drives vigor, but to find what's interfering with it.


What factor could have such an effect? The growth of finance could have such an effect. In particular, the growth of the cost of finance.

Note that "the cost of finance" does not refer only to the rate of interest, but also to the size of the debt on which interest must be paid. The rate of interest, and the accumulation of debt.

Growing financial cost eats into the profits of nonfinancial business, creating upward pressure on prices. Growing financial cost eats into consumer income, creating downward pressure on aggregate demand. Undisturbed, these two consequences of the growth of finance can combine to create an effect which looks very much like cost-push inflation.

It *is* cost-push inflation.

The growth of finance may have been responsible for the cost-push onset of the Great Inflation in the 1960s, and even for the inflation of the latter 1950s which so troubled Samuelson and Solow. This would mean that the size of finance has been excessive -- has been enough to create problems -- for a very long time.

The cost-push inflation problem was "resolved" by Paul Volcker who, as head of the Federal Reserve, simply decided that there's no such thing as cost-push inflation.

Polly want a cracker? Polly wants a raise!

And respect. Polly wants respect.