Transcending Economies, Transcending Economics

M S Sriram1

An Essay based on
Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change
By Edmund Phelps (Princeton University Press)

Where does the modern day corporation emerge from? Where is the corporation located in
the larger societal fabric, and under what frame work does the corporation work? These are
some of the large questions that Phelps tries to answer in his recent book. The modern
corporation is not very old in the history of humanity, but it is old enough – to cover a few
centuries of economic exchanges.

The book engages with the concept of a “modern economy”. How do we achieve happiness
in a just and equitable society? The process of unravelling what a modern economy leads to a
discussion of multiple economic ideas capitalism, socialism, Marxism, corporatism. All these
ideologies are discussed in the context of economic growth, common good and happiness.
Part of the upside story of “growth” is measured by statistics and data which makes the
argument obvious. However, every upside story has a collateral. Somebody sacrifices for the
larger common good. The governments claim eminent domain willing to put a few at
discomfort, even through the might of the law, in order to achieve a larger good. The
discomfort, the collaterals are not poignantly captured by data. These stories are captured
through art and literature. A careful reading of the texts and sub texts lead to an assessment
of how people perceive the changes.

The ideas of economic growth, scientific invention and commerce happen in a in the context
of a larger eco-system. Nothing happens in vacuum – even individual excellence and
scientific discoveries and inventions happen at a time and place; the context is as important
as the event. The following quote helps to understand the background:

“Some might think to say that gifted inventors, even if untrained, were adding to
scientific knowledge when their tinkering led to an invention. But these inventors did

1Centre for Public Policy, Indian Institute of Management, Bangalore.

 not create scientific knowledge any more than bartenders inventing new drinks create
chemical knowledge: they lacked the training to do so. An addition to scientific
knowledge occurred if and when trained theorists managed to understand why the
invention worked. (It took a musicologist to see how Bach’s cantas “worked”).
(p.13)

So, what makes this modern economy? Where are the ideas coming from? Are they from the
science labs? How do ideas emerge? How do we understand the non-pecuniary motives
driving innovations? How do these ideas grow, and spread? These are difficult questions.
But the seeds of a modern economy are here: where ideas, innovation and invention were
converted to economic products leading to an explosion of material benefits. The modern
economy is about increase in productivity- resulting in fast and boundless growth.

But of course, the question was whether this growth has resulted in widespread benefit?
While the numbers of rich have increased, what about the wages of the unskilled workers?
Are they benefitting equally from the innovation and the modern economy?

To trace the evolution of the modern economy and the corporation several unrelated events
and dots are to be connected. Overall there is an absolute and real increase in wages; there is
a reduction in incidence of disease. Advance of science (even when it is elsewhere) benefits
the humanity as a a result of international exchanges. There is reduction of poverty and
pauperism. But this comes with other phenomena. First is urbanization. Phelps argues that
rural areas only had under employment but not unemployment. If you are self-employed,
your unemployment is equal to under employment!

Working for somebody, for an enterprise or a corporation defined what employment was,
and also sharply defined the phenomenon of unemployment. Urbanization was on the rise,
because it was a worthwhile trade-off for the underemployed rural populace to find more
meaningful ways of seeking economic well-being. But is that all good? Not necessarily. What
happens when you move to the urban areas leaving your under-employment status and
acquire a status of being un-employed? Refer to the poems of Blake and the image of “dark
satanic mills”.
Urbanization is also about clustering. People went to places where there were new ideas, new
challenges; industrial agglomerations. Like in IIMs. For a student there is as much learning
from just being with others and in the hostels as there is in the classroom. The
agglomerations lead to cumulative knowledge creation. You do not re-invent the wheel,
when you know that somebody has already invented it. You improvise on its utility. This
happens through clustering and exchange of ideas at workplace.

So the quality of life and moving out of poverty was not only the economic aspect, but the
pleasure of encountering new problems and the satisfaction of solving them. This nuanced
view is evidenced by this observation: “Charlie Chaplin’s image of the assembly line in his 1937 film
Modern Times looked more mindless than oppressive” (p.52). Modern economy, while it brought
higher wage and better financial returns, also had associated questions on impacts on mental
stimulation.

Modern economies also brought benefits in better health and longevity. Even the less
advantaged had these benefits. This led to a different perspective: more time invested in
equipping oneself and planning for a longer career. Going to a “work place” beyond the
closed community relationships led to an “interchange” of ideas – where a large number of
diverse people turned up. So what happened to people during these changing times? These
impacts are not found in data. They are found in the ideas expressed in the works of Charles
Dickens, Mary Shelley, Emile Bronte, Jane Austen, Balzac and Emily Zola. We need to
question Ceteris Paribus (All other things being equal): all other things are never equal; we
live in a dynamic world; and we pick up signals from multiple fields to understand the
changing phenomenon of the dominant paradigm.

With innovation, modernization, longevity and better quality of life as a backdrop we should
understand the larger eco-system. This eco system consists of institutions of governance
(feudal systems, church, governments); institutions of justice; institutions that grant
ownership rights on property.
As the world is moving from production based economies to idea based commerce, there
is= a need to protect intellectual property rights. The modern enterprise has its base as much
in the intensity of capital required for centralized manufacturing as the need to protect
intellectual property rights. The emergence of the enterprise or the corporation is not a pure
function of innovation and risk taking. It needs an eco-system that provides protection for
investments in ideas. This comes through patent laws that provide exclusivity to
commercially use the ideas to reap the benefits of investments.

Just ideas and inventions do not result in economic phenomena. Protecting intellectual
property makes sense only when there is a possibility of commercial exploitation of the idea.
A commercial exploitation needs an element of scale. It has to move beyond the individual
capability. Chartered corporations that undertook business with the backing of monarchies,
laid the framework for a corporation. Initially Charters were set up with the intention of
trade, exploration and colonization. However, as monopoly institutions with state support,
charters did not have the agility to innovate and expand the horizons. The concept of
competition is as essential for the new ideas to emerge, as it is for the ideas to be protected.
Monopolistic Charters were a hurdle. Eventually the charters grew into the idea of a joint
stock company. A joint stock company (or the modern day corporation) could accumulate
capital from diverse sources. While in the past it was only the State that had the resources to
invest in something that was capital intensive, the formation of a modern day corporation
provided with an alternative where a large number of people could pool in the resources to
create a large business house. However, since the set of investors were diverse and dispersed
without full information and control over the happenings in a corporation, they needed
some protection. Similarly risk taking entrepreneurs also needed some downside protection.
The concept of limited liability provided this protection. The legal framework for this
emerged in the United States and moved on to Great Britain and then extending all the way
to Germany and France.

Not only did the limited liability clause play a vital role in bringing in the vibrancy of the
corporation, it had to be followed up by better bankruptcy protection laws and a vibrant
banking system to put the other pieces in the jigsaw together.
On the political front, the movement towards representative democracy has provided an
ecosystem for accountability. Accountability to the electorate supported the interests of the
underserve. The voices of the poor and disposed are being heard through the electoral
process. The concept of universal suffrage makes the modern governments more responsive.
This meant that the governments moved towards publicly funded education, healthcare,
social security and opened support institutions. While there are downsides to this, the larger
ecosystem for enterprise to flourish is more likely in a representative democracy than an
autocracy.

While urbanization brought about the concept of unemployment, the modern economy
brought into sharper focus and discourse the concept of taxation. As democracies, the
governments collect money from the wealthy to provide social security for the deprived.
This brings to the fore, the question of inclusivity. Does the modern economy and its
growth provide opportunity for everybody to get employment and a share in the economic
action? Phelps argues that if capitalism is working in the right spirit with other institutional
mechanisms fostering innovation, the answer might be yes. But most of the time capitalism
does not work the way it ought to – the governments direct the economic space in a manner
that stymies innovation and free trade. This could happen if the state was a major actor as it
were in the Chartered companies, and it could happen when the state resorts to corporatism
– an arrangement when the state favours agreements with corporations and workers to
create exclusive rights. In the Indian context, this could have happened in the licence raj, and
might be continuing with crony capitalism.

Phelps argues that the age of innovation and mass flourishing happened between 1820s and
the 1960s (the years of the great depression notwithstanding). He argues that this was a
western phenomenon led by the United States and followed by European nations. He
illustrates why China, though it had the ingredients of density of population, exchange of
ideas, innovation and even enterprise did not keep up as it lacked economic institutions and
economic culture and the form of government.
Let us now look at the economic thought that was against the concept of modern economy
– Socialism and Corporatism. In reviewing these ideological constructs, Phelps argues that
neither the middle-income earners were pushed into the proletariat, nor did wage inequality
appear to increase (p.114). The discontent with the modern economy was more to do with
the precariousness of jobs and wages – the episodic high unemployment and recession that
lead job losses in certain sectors. Phelps sees socialism as a concept with inherent
contradictions. Let’s look at this quote of Sassoon that he reproduces:

“Socialism’s appeal, when it had one, was to say, at one and the same time, that its
mission was to transcend capitalism while improving it; that everyone was equal by
that the proletariat was the leading class; that money was the root of all evil but the
workers needed more of it; that capitalism was doomed but the capitalists’ profits
were as high as ever; that religion was the opium of the people but that Jesus was the
first socialist; that the family was a bourgeois conspiracy but it needed defending
from untrammeled industrialistion; that individualism was to be deplored but that
capitalist alienation reduced people to undifferentiated atoms; that there was more to
politics than voting every few years while demanding universal suffrage; that
consumerism beguiles the workers but they should all have a color television, a car
and go on holidays abroad.”

Phelps sees socialism as a concept with inherent contradictions, examining tension between
socialist values and Western humanist values. While Phelps looks at socialism as an ideology
to be debated and critiqued, he does not think that Corporatism has strong ideological roots.
It could be the association of Corporatism with Mussolini and the fascist regime and it could
also be that Corporatism is also anti-competitive in nature. However he engages with the
concept at length, citing examples from Europe, where it evolved, how it grew and why it
was not a positive thought for the modern economy. Phelps argues that corporatism was
anti innovation, anti-enterprise and anti-growth. He even indicates that the reason for the
decline of the Western enterprise, particularly of the United States is because of the modern
day corporatism. While the global recession and slowdown is seen as recent phenomena
tracing back to the collapse of the wall street in 2008, Phelps traces this recession back to the
1970s.
Phelps also has a section “Regaining the Modern” that deals with the approach to taxation.
Low taxation, heavy borrowing – and spending – both on welfare as well as a supply side
Keynesian measure to maintain growth leading to very high fiscal deficit is unsustainable.
Not only did the State borrow, but it encouraged corporations and individuals to borrow –
in the hope that this would lead to growth and larger tax collections. That this did not work,
is there for us to see.

A high tax regime with a wider net gave State enough resources for funding infrastructure
and public projects. A low tax regime (even if there was very high growth), wider compliance
and exemptions at the lower level resulted in an illusion of “reduction in take home
inequality” but actually reduced investments in public infrastructure leading to the poor
paying out of pocket for some services (education, healthcare) that should have been
available in public domain.