Stiglitz vs. Phelps

I read this Q&A with J. Stiglitz and thought it a much more thoughtful and interesting read than Phelps, who happens to have won the Nobel Prize. This is normal, unfortunately.

Stiglitz:

Q. Since the beginning, economics has sought to perfect “economic well-being” as in, lay down the conditions to maximize well-being and explain faltering well-being. What does this well-being entail? There should be a definition of economic well being that functions independently of capitalist or socialist classifications. Would you care to explain your definition of the one entity that guides all economic theories: “economic well-being”?

Himanshu Kothari
United States

A. There is no simple measure of economic well-being, and unfortunately, the standard measure, gross domestic product per capita, is misleading. This is important, because what we measure affects what we do; and if we try to “maximize” the wrong thing, there can be serious adverse consequences.

I stress the importance of equitable and sustainable development and growth. GDP can be going up, yet most individuals can be worse off (as has been happening in the United States during the past 5 years).

Similarly, GDP can be going up, yet standards of living going down, as the environment becomes degraded, so much so that life expectancy can even decrease. When I was chairman of the Council of Economic Advisers, I pushed for the use of Green GDP, where account is taken both of the depletion of natural resources and the degradation of the environment.

If a country’s growth is based on depleting renewable natural resources, its growth will not be sustained. Neither will growth be sustained if it is based on borrowing—when debt is used to finance consumption, not investment. Argentina’s growth in the early 90s was based on debt financed consumption, and selling off its national assets (often at unreasonably low prices). The inevitable day of reckoning came, and the country’s economy collapsed. Today, many are worried about America, whose growth is based on borrowing more than $3 billion a day from abroad.

GDP may be a misleading measure for another reason: it measures the value of what is produced in the country, not the income of the citizens of the country. When a developing country opens up a mine, with low royalties, most of the value of what is produced may accrue to the foreign owners; and when account is taken of the environmental degradation and resource depletion, the country may actually be worse off. [Keep reading...]

Phelps:

Dynamic Capitalism, by Edmund Phelps, Commentary, WSJ: There are two economic systems in the West. Several nations -- including the U.S., Canada and the U.K. -- have a private-ownership system marked by great openness to the implementation of new commercial ideas coming from entrepreneurs, and by a pluralism of views among the financiers who select the ideas to nurture by providing the capital and incentives necessary for their development. Although much innovation comes from established companies, ... much comes from start-ups, particularly the most novel innovations. This is free enterprise, a k a capitalism.

The other system -- in Western Continental Europe -- though also based on private ownership, has been modified by the introduction of institutions aimed at protecting the interests of "stakeholders" and "social partners." The system's institutions include big employer confederations, big unions and monopolistic banks. ... The system operates to discourage changes such as relocations and the entry of new firms, and its performance depends on established companies in cooperation with local and national banks. What it lacks in flexibility it tries to compensate for with technological sophistication. So different is this system that it has its own name: the "social market economy" in Germany, "social democracy" in France and "concertazione" in Italy. [hat tip to http://economistsview.typepad.com/] [Keep reading]

Phelps works his way through the usual clichés about U.S. vs. Europe. What is surprising is that it is so...unsurprising. Here is is brilliant conclusion:

Actual capitalism departs from well-functioning capitalism -- monopolies too big to break up, undetected cartels, regulatory failures and political corruption. Capitalism in its innovations plants the seeds of its own encrustation with entrenched power. These departures weigh heavily on the rewards earned, particularly the wages of the least advantaged, and give a bad name to capitalism. But I must insist: It would be a non sequitur to give up on private entrepreneurs and financiers as the wellspring of dynamism merely because [of the imperfections from these departures]. 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

Capitalism is justified because otherwise entrepreneurial types would be creatively stifled. Ok. Deep. But he also says that capitalism plants the seeds of its own degredation. Really, what is one to conclude from this abstraction?