Phelps on Capitalism and Innovation

Nobel laureate Edmund Phelps has an interesting essay, "Economic Justice and the Spirit of Innovation," in the October 2009 First Things.

The issue of morality in economics is neither the fairness of income distribution nor the stability of financial systems. It is how human institutions can be shaped to correspond to human nature—to man’s nature as an innovator.... Prosperity and the development of the human spirit are linked in the dynamism of the economy. The dynamism of the American economy over the past two hundred years was strong, and that helps to explain why prosperity was high both in the sense of high employment and the sense of a high degree of personal satisfaction compared to that in other countries.... That is the positive moral content of economics—to realize an anthropology that starts with innovative human nature: homo innovaticus, not homo economicus. Existing economics has a negative moral content in that it treats economic factors as though they were pieces on a game board rather than human beings who learn, discover, and innovate. Politicians play the same game, channeling resources from one activity or social group to another without considering the effect on the creativity and judgment exercised within the economy and thus the deep rewards the economy imparts or fails to impart.... Even now, in the midst of an economic downturn, there are signs of vitality that weren’t present in the 1950s. There is exuberance, however irrational, in the banking system, and some originality here and there in hedge funds and private equity, and still some inventiveness in Silicon Valley. Although they may have caused more problems than they were worth, the exotic, new financial instruments showed that America is still the world’s leader in invention. They reflect America’s capacity to create. Unfortunately, the markets were unsophisticated and set mistaken asset prices.