Tue, Jun 21, 2016 - Page 8 News List

China must aim for ‘good economy’

By Edmund Phelps

Decades of plodding growth together with the 2008 financial crisis have prompted a seismic shift in economic thinking in much of the world. There is talk of moving resources from investment to consumption, from heavy industry to “services,” and from private sector to public sector. However, what strikes me is that these arguments focus only on improving the mix of outputs within an economy, with no attention paid to labor.

This is obvious in the case of China, now the world’s biggest economy by some measures. No doubt, China must reject further investment in hulking steel mills and empty apartment buildings. However, at the same time, it must focus on workers and elevating the experience of their work, which economists from Adam Smith to Karl Marx and Alfred Marshall placed at the center of their concerns.

Not everyone agrees. When it comes to the experience of work, many people, especially in continental Europe, believe that optimal allocation — entailing well-functioning institutions — if accompanied by investment in education, is all that is needed. After all, Italians, Germans and French work hard and well over a relatively small number of hours, resulting in high hourly productivity and wages — higher than in the US and the UK.

Yet continental Europeans do not seem particularly happy with their work. Circumstantial evidence is their preference for record-setting vacations — and relatively low labor force participation. Data on job satisfaction provide direct evidence: among large Western nations, workers in continental Europe report the lowest levels.

That is not surprising. Europe’s companies are generally no longer places where new stimuli and new challenges engage workers’ minds. However, if China should avoid the efficiency-seeking European model, which model should it embrace?

I say in my book Mass Flourishing that the right model is the good economy, which is an economy that offers the good life. Optimal resource allocation — of which efficiency is a part — is a necessary, but not sufficient, feature of a good economy. Indeed, a single-minded focus on raising domestic consumption is likely to distract China’s leaders from other policies needed for a good economy.

Here I differ with many economists — including my dear friends Joseph Stiglitz, Jean-Paul Fitoussi and Vladimir Kvint — whose preferred standard is the quality of life. By this they mean mainly ample consumption and ample leisure, together with public goods — for example, clean air, safe food and safe streets — and civic amenities such as municipal parks and sports stadiums.

This is a fleshed-out version of an ideal traceable to antiquity. I do not oppose these services or their provision by the state, but they do not add up to philosophers’ concept of the “good life.” Aristotle joked that we need these services to recover for the next day’s work.

Another dear friend, Amartya Sen, said that economists’ focus on consumption leaves out people’s need to “do things.” However, he does not go far enough. People want out of programs of work in which they have no autonomy.

For a good life, people need a degree of agency in their work. They want to be able to take the initiative and do work that is engaging. People value room to express themselves — to voice their thoughts or show their talents.

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