Some commentators have recently stressed the importance of incorporating creativity and “design thinking,” specifically in business education. (See, for example, David Dunne and Roger Martin, “Design Thinking and How It Will Change Management Education: An Interview and Discussion,” Academy of Management Learning and Education, vol. 5, no. 4, 2006.) Phelps has formalized an economic rationale supporting that concept. When schools advance a more general business education with a focus on opportunities, preparing future managers and entrepreneurs to act on the “Eureka!” moments that signal a new idea, the whole economy becomes more dynamic. In such an economy, workers — even if they aren’t entrepreneurial themselves as individuals — are generally more satisfied. In short, these economies yield tangible benefits and psychic opportunities that many people associate with the good life.
As Phelps noted in his Nobel lecture, his research on entrepreneurship has, at its heart, a question that has been asked since ancient times: “What is the good life?” He argues that the highest-quality life is one with a “career of challenges and personal development,” and he traces the history of this idea from Aristotle through Benvenuto Cellini, William Shakespeare, Thomas Jefferson, and William James, up to Abraham Maslow, the psychologist who devised the hierarchy of human needs, and John Rawls, a philosopher of economic justice. This idea first became prominent, says Phelps, “when there were grand projects and heroes” — that is, when the transformation by innovation of work in the modern economy led to greater pursuit of satisfaction in creative employment. His most recent writing on this subject is an essay called “The Economic Performance of Nations: Prosperity Depends on Dynamism, Dynamism on Institutions,” published in Eytan Sheshinski’s anthology Entrepreneurship, Innovation, and the Growth Mechanism of the Free-Enterprise Economies (Princeton University Press, 2007).
Phelps mentioned one early test of this idea in his Nobel lecture. When job satisfaction and general satisfaction were scored by the World Values Survey (an international study of political and cultural beliefs, archived at the University of Michigan), satisfaction scores were higher in dynamic economies. These economies have high levels of research and development spending, labor force participation, and economic growth. If such correlations prove causal, Phelps noted, the emphasis in public policy in many countries might shift from cushioning losses from change (the European social model) to reforming financial, labor, and product markets in a way that enables both creative destruction and nondestructive creation.
“A country’s dynamism, being slow to change, is not measured by the growth rate over any short- or medium-length span,” Phelps wrote recently in an op-ed called “Entrepreneurial Culture,” published February 12, 2007, in the Wall Street Journal. “The level of dynamism is a matter of how fertile the country is in coming up with innovative ideas having prospects of profitability, how adept it is at identifying and nourishing the ideas with the best prospects, and how prepared it is in evaluating and trying out the new products and methods that are launched onto the market.”
Parts of the industrialized world, particularly the United States, have built up and grown accustomed to an impressive level of dynamism over the past 150 years. The measures that Ned Phelps suggests — more institutions like stock markets, more precise regulation, and more ingrained general education — have all been talked about before. But for the first time, there is a clear case for institutionalizing these values and for recognizing the ways in which the psychic rewards of the good life and the unfettered experimentation of the entrepreneur reinforce each other.
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Glenn Hubbard (email@example.com), a former chairman of the Council of Economic Advisers under President George W. Bush, is the dean and Russell L. Carson Professor of Finance and Economics at Columbia Business School.