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A Call for Institutional Innovation

Frank,

Touché! I agree 100 percent. What I meant to say is that, left to its own devices, the Creative Economy WILL create this outcome. Right now we ARE living with this highly unequal, very spiky outcome. But I agree with you. It does not, and should not, have to be this way.

Institutions matter. Your work with Temin is incredibly important. Somehow, with our collective belief in the power of the market—spurred by the flat-world mythology—we have forgotten that. I recall a seminar at MIT some years ago when the late, great Ray Vernon cautioned us all about the naive faith that globalization will essentially lift all boats. Vernon said, more or less, that he had lived through several eras of globalization, and that every time this naive faith arose—that the market could do it on its own—something very troubling, politically and economically, was around the corner.

I agree entirely about the so-called golden age. Its success at lifting incomes and lifting productivity came from a whole series of institutional innovations at the national and global scales. The genius of FDR, love him or hate him, is that he understood that industrial capitalism was a) generating inequality b) causing unemployment and other negative economic outcomes, c) shaping all sorts of political unrest, and d) holding down potential productivity improvement as well as holding back demand. The solution then lay in institutional innovations which, among other things, linked wage increases to productivity improvement, stimulated demand in various ways, and basically allowed more regular working people (like my factory-working father) to participate more fully and benefit to a greater extent from the Industrial Economy. These innovations turned formally low-wage, insecure, and dangerous industrial work into the so-called “good jobs” we bemoan losing today.

In a word, we succeeded through these institutional innovations in turning a highly unequal, sub-optimizing, and politically fragile Industrial Economy into a much more stable and cohesive Industrial Society, basically by including a broader segment of the working population in the social compact.

The problem we face today is quite analogous to the one faced by FDR and company in the 1930s. The problem is that virtually no one in a position of leadership (in either party) seems aware of it or willing to talk about it. I am amazed by how absolutely disconnected the Washington D.C. policy-making community is from this reality. It’s simply business-as-usual—if we ignore these things, they’ll simply go away.

We need to stop talking simply about competitiveness, growth, innovation, the knowledge economy, or even the creative economy. We need to start a conversation about building what I call a Creative Society—one that produces institutional innovations that can extend the productivity gains of the creative economy to a much broader group of people.

Honestly, I think it’s our only way forward. Right now, as Frank says, the creative/knowledge/innovation economy is generating greater disparity than in decades past. This disparity between creative haves and creative have nots is producing our terribly polarized politics—red and blue states, culture wars, and all the rest. One side will never best the others, so we will continue to swing back and forth between highly polarized political outcomes, failing to produce the institutional innovations we need to really generate sustainable economic results.

We need a whole series of institutional innovations that can square this circle by increasing the participation of manufacturing and service economy workers in the creative economy, ensuring that they realize material and, just as importantly, non-material benefits (i.e., better working conditions, more fulfilling and challenging work, and so on). We need to do so in a way that harnesses more of their creative energy and innovative capability (ala Toyota) for economic gain.

I don’t think we need massive federal programs to do this. My hunch is the FDR/New Deal system was workable in the old hierarchal Industrial Economy framework. My sense now is that the way forward is to work through much more decentralized local channels to develop these institutional innovations. In this sense, our American federalist system is a huge advantage, enabling all sorts of local experimentation. And, interestingly, as I mentioned toward the end of Flight, the local level is precisely where partisan differences are most muted and where consensus runs high. When I visit cities and towns across the United States and talk about their own economic development, it is nearly impossible for me to tell who is Republican and who is Democrat.

Now to the hard part. What kind of institutional innovations would be most effective in helping us move from a Creative Economy to a Creative Society? How can we do this in a way that best makes use of market incentives and network structures and moves away from a federal/top-down/vertical hierarchy? Here’s a question I asked recently of Sweden’s leaders, who are grappling with the question of how to recast their social welfare state in ways that could help spur self-expression and individual effort: What would a social support structure for a Creative Society look like? Or taking Frank’s question: What would a set of institutions need to look like in order to generate the maximum creative economic innovation and growth while also encouraging greater participation and cohesion?

What to consider? Where to start? How to begin fashioning a series of experiments that could lead us down this path in an economically productive and politically feasible way?

These, I think, are the REALLY important questions of our time. We need your ideas… Anyone out there want to weigh in?

Also from This Issue

Lead Essay

  • The Future of the American Workforce in the Global Creative Economy by Richard Florida

    In this month’s lead essay, Richard Florida, bestselling author of Rise of the Creative Class, argues that the old industrial era has given way to a new creative era. Science and technology, art and design, and culture and entertainment have superceded natural resources and industrial infrastructure as the key to economic success. Talent is now the key factor of production and winners in global economic competition will be those who can best deploy and attract it. However, the creative economy is a source of increasing inequality both within and between nations. Florida argues that the key to bridging the gap between the creative and service sectors is to harness the creativity of service sector workers to make their jobs both higher-paying and more satisfying.

Response Essays

  • Reality and Fantasy in Economic Revolutions by Robin Hanson

    In his reply to Florida’s lead essay, George Mason economist Robin Hanson argues that creativity matters less for economic growth and the future of work than Florida thinks. According to Hanson, Florida’s emphasis on creativity distracts us from the prospect of a truly revolutionary change to work and economy just over the horizon: rapidly exponential growth driven by smart machines. “An economy with intelligent machines could grow very rapidly indeed,” Hanson argues, “and induce rapidly falling human wages.” Will we be prepared if we’re busy making the Creative Class comfortable?

  • Education and Inequality in the Creative Age by Frank Levy

    MIT economist Frank Levy agrees that creativity is more important than ever in a world where computers and foreign workers can do routine work less expensively than domestic workers. This shift, Levy says, requires better education in problem-solving. But education can only do so much. The gains from rising labor productivity are going largely to the wealthy, Levy argues. Unless policies and norms are reinstated that spread those gains more widely “all of the nation’s institutions will be at risk.”

  • Wealth and Power in the 21st Century by Edward E. Leamer

    While agreeing with much in Florida’s essay, UCLA economist Edward Leamer suggests that the key to understanding the future of work isn’t creativity, but talent. “Is a personal computer like a forklift or a microphone?” Leamer asks. Forklifts are forces for equality, washing out individual differences in ability. Microphones, on the other hand, amplify difference in ability and talent. If training cannot create talent, but can only enhance it, the gains to training will be highest for the talented, and it will not be possible to close the talent and wage gaps by offering more training to the less talented.

The Conversation