Kourosh Ziabari- Tehran Times: The United States’ economy is experiencing ups and downs these days, especially following the eruption of the widespread economic crisis that began to take in the West since early 2010. The United States was once a thriving and robust economy; however, the American people are currently experiencing such questions as poverty, unemployment and other economic difficulties.

Prominent economist and the 2006 Nobel Prize laureate in economics Edmund Phelps believes that the economic disadvantage in the United States is far more extreme than it is in countries such as Switzerland or Uruguay.

“I know there is a sense that the new technologies are not raising the value of labor in the production process, thus not raising wages. I can understand how that could happen. But I continue to believe that the slowdown of labor productivity – output per man hour – is largely the result of a slowdown of innovation in the aggregate,” said Prof. Phelps in an exclusive interview with Tehran Times.

Prof. Edmund Phelps is a world-renowned economist and has been teaching political economy at the Columbia University since 1982. He is also the director of Columbia’s Center on Capitalism and Society. In 2007, he won the Nobel Memorial Prize in Economic Sciences for “his analysis of inter-temporal tradeoffs in macroeconomic policy.”  Prof. Phelps has lectured extensively around the world and holds honorary doctorates from universities in different countries including Université libre de Bruxelles (2010), Tsinghua University (2007) and the Institut d’Etudes Politiques de Paris (2006). His latest book “Mass Flourishing” was published by the Princeton University Press and attracted widespread international attention.

Tehran Times has conducted an exclusive interview with Prof. Phelps and discussed different issues with him, including the economic crisis in the United States and Europe, the rise and fall of indigenous innovation in the United States, job satisfaction, economic growth and the Eurozone debt crisis. What follows is the text of the interview.

Q: In one of your articles, you noted that from 1820s up to 1960s, the United States experienced its peak of indigenous innovation; however, the rate of innovation began to drop by about half in the early 1970s. Would you please elaborate on the factors that helped the United States reach that peak, and the reasons it lost its position later on?

A: Of course, various institutions had to be created and developed to support high innovation; for example: regulations to protect households and firms from buying new products that are unsafe or do not function. There also had to be markets for shares in enterprises. But the essential ingredient for indigenous innovation is the “values” – the attitudes, beliefs and norms that will generate a spirit of innovation.

Q: The recent Population Survey data show that roughly around 46.5 million Americans live below the government-defined poverty line. Moreover, it was reported in 2012 that 49 million Americans live in food insecure households. Why should there exist such a large number of impoverished people in the United States that enjoys a thriving and dynamic economy with thousands of firms, banks and companies which create equal job opportunities for the people?

A: I believe that in America economic disadvantage is far more extreme than it is in Switzerland or Uruguay. However, the failure to erect a massive system of subsidies to companies for their employment of low-wage people is a government failure of the first rank.

Q: Part of your research at the Cowles Foundation was focused on neo-classical growth theory. The aim of this theory, known as the Solow-Swan model, is to study long-term economic growth by taking into consideration such components as productivity, capital accumulation, population growth and technological progress. I want to focus on the role of the technological progress, as we are in the age of communications and technology. How can technological progress contribute to economic growth? Is there a reverse relationship? Does economic growth necessarily lead to technological advancements in a country?

A: I know there is a sense that the new technologies are not raising the value of labor in the production process, thus not raising wages. I can understand how that could happen. But I continue to believe that the slowdown of labor productivity – output per man hour – is largely the result of a slowdown of innovation in the aggregate, with some states, such as California, generating lots of innovations, and the states in the Great Plains and the South not doing much – even Chicago, Detroit, Cleveland, St. Louis and the other mid-west cities.

A: You discussed the issue of job satisfaction in one of your recent op-eds. Is job satisfaction dependent on other different variables such as the quality of the job or the level of productivity and creativity the workers invest in their work which do not have anything to do with the payments and wages, but affect the general job satisfaction?

A: Research on this subject has been going on only for a few years. However, I am sure that job satisfaction derives from the experiences in the job – interchange with others, novelty, interestingness, challenge, excitement, achievement and personal growth.

Q: In your important book “Mass Flourishing,” you discuss the different aspects of “prosperity”. You say that prosperity has two sides: material and nonmaterial. I want to focus on the nonmaterial aspect of prosperity. Is it simply achievable through getting adequate payment for the work you do, the service you offer or the product you produce? What do you think about those people who have a very luxurious and affluent lifestyle and very high incomes, but don’t feel pleased and happy in their life?

A: Many people use their ability to earn a high income to sacrifice a little income in return for a more interesting job. Others accumulate income in order that, later on, they can use that wealth to do interesting things.

Q: There’s something which always surprises me, and that is the relationship between the Gross Domestic Product and income equality. There are many countries that have a high GDP and are considered as generally wealthy countries, but there isn’t a reasonable distribution of public income among their people. Moreover, poverty is also quite prevalent in some of these countries. What variables affect income equality and why is it that some rich countries in terms of GDP have a high percentage of poverty and income inequality?

A: It is important to distinguish between pathological inequalities that result from the political power of various special interests and inequalities that are the result of differences in opportunity or luck. These days the disparity of income between the top 1 percent and the 99 percent is in some part the former and in some part the latter.

Q: Compared to such vibrant economies and industrial powers as Britain, Germany and France which you’ve studied in your works, the United States lacks the factor of historicity. The oldest factories, industrial units, companies, hotels and universities were founded in Europe and Japan several centuries before the United States. However, the United States, with a history of no more than 237 years, has overtaken all of the economic giants in the world and is now the world’s foremost economic superpower. What are the main reasons that contributed to this swift development and underpinned the U.S. economic growth in this relatively short period of time?

A: I believe that the people of America were more richly endowed with the values that encourage an innovative spirit than the people of France, Germany, and Britain. Although these nations showed more dynamism than Holland, Belgium, Spain and even Italy, they possess not only a modernist streak but also a set of traditional values that cause them problems. As you suggest in your question, the strength of traditional values is in some part the result of the lingering influence of medieval times in those countries. America was settled – from the 1600s to the 1800s – with people who were trying to escape from those traditions.

Q: You’ve dedicated an entire book to the concept of political economy, and are currently a professor of political economy at the Columbia University. Are there certain variables that indicate the relationship between political power and economic growth? Can the failed states have a thriving and robust economy? What about the countries which are globally isolated as a result of their political ideology? Can they have a healthy and successful economy?

A: When a corporatist philosophy in a nation permits a wide range of special interest groups to gain considerable political power, the result is that the nation ends up with a corporatist state – rent seeking, lobbying, patronage, state-backed monopolies, extensive licensing and barriers to entry. The individuals who would be start-up entrepreneurs or innovators are inevitably going to find such a society to be an unpromising environment in which to start up new enterprises that intent to enter various industries and take customers away from the entrenched companies. The end-result is that no one innovates – the outsiders because they cannot get through the protections erected around the established companies – and the established companies because they have no more fear of start-ups entering their industries. Both prosperity and economic growth are blocked by the corporatist philosophy and the corporatist state that it brings.

Maybe a trading nation – a mercantile sort of economy – can function in a country with a failed state. But such a country can never exhibit the grassroots dynamism needed for endemic innovation.

Q: Iran’s economy has become inflationary for a while as a result of excessive money supply in the society. What’s the solution for a country like Iran to tackle its inflation problem and slash it?

A: Iran could try the supply-siders’ trick of tightening money while lowering tax rate — at the cost of running fiscal deficits. But if the public debt is already very high, that policy could cause a loss of confidence within the economy. There could also be the risk that the government would lack the political support necessary to withdraw — even gradually – the tax cuts after the inflation has subsided.

Q: What’s your viewpoint regarding the Eurozone debt crisis that began since 2009? In an op-ed you co-wrote with Amar Bhidé, you alluded to the fact that the governments, unlike the private borrowers, don’t have any collateral to offer to the lenders and as a result, they are not in any way committed to liquidate their debts and consequently we face such debacles as the Greek debt crisis. How can the Eurozone countries, especially Greece, that is the world’s most indebted country, solve this problem and repay or refinance their government debts?

A: Greece, Britain and even Italy appear to have got a firm grip on their fiscal deficits so the public debt will be declining as a ratio to GDP. In my opinion, this unfortunate episode of fiscal irresponsibility will be a thing of the past, at least for a decade or more. What is little understood is that the more fundamental problem of slow growth, owing to a disappearance of dynamism from Germany, France and even Italy will not go away until those countries take revolutionary steps to modernize thoroughly their economies.

Q: As a Nobel Prize laureate and a prominent academician, you’ve experienced the academic environment of different countries, especially the United States and Britain. How do you see the state of economic studies and research in these countries? Which universities are currently doing better in promoting academic endeavors, including conferences, lectures, publication of books and research projects, in the field of economic sciences

A: It is quite interesting to see the rise of Tsinghua University and some of the other top universities in Asia while the Western universities seem to be in a gentle decline. No one can know what the Western nations will do once their once-great universities find themselves on a par with the improved universities in Asia.

Q: As a final question, what’s your recommendation and message to the young Iranian students of economics as an essential and important field of study, especially those who want to become great and impressive economists in the future? What do you have to tell exclusively to the Iranian readers of this interview who have an emotional attachment to economics, like yourself?

A: Keep reading, of course – not only the economic literature but also the imaginative, fictional literature of the world and also the great novels and biographies of creative works and heroic explorations. Remember that the members of society, especially the younger ones, need not just consumption and the leisure to be able to consume. They also need to have a life.

This interview was originally published by Tehran Times daily.