China, Europe and the Netherlands: Opportunity Is Knocking at Our Doors

Apr. 2015 
  045 
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be unimaginable today. Money has become the metric 
for assessing a person’s success and main satisfactions: 
Parents and spouse urge a young person to opt for high 
pay and job security rather than to embrace uncertain-
ty and to journey into the unknown. Pathological ma-
terialism leads to rampant short-termism in business 
and finance. No wonder people who grew up hoping to 
embark on a career of challenge and adventure forget 
this dream and drift into a lesser life.
Questions can be raised about whether, in recent 
decades, young people throughout American society 
have possessed the intellectual equipment – the capac-
ity – required for innovating. In general, an innovator 
had to have insights into whether the newly conceived 
product would succeed in the market – insights typ-
ically born of business experience as well as “talent.” 
The baby boom generation brought into the labor force 
many people who were much less familiar with the 
world of business than the people of the previous gen-
eration and much less interested. The new generation 
may be different. 
Societies must give aspiring innovators wide latitude 
if innovation is to be widespread. Yet huge blocks to 
innovation have been erected in America. Vested inter-
ests, such as established companies – their owners, the 
management and the work force – feel entitled to be 
defended against the competition that new innovators 
would bring and to bailouts in the event they suffer 
losses of market share to new competitors. Politicians, 
for their part, feel entitled to curry the favor of inter-
est groups. This is the culture of social protection. A 
result is that any aspiring innovator contemplating 
an attempt to bring a new product or method to an 
established industry will realize that he or she would 
be doomed to failure because the state will protect the 
incumbent companies from losing their market share. 
In the past couple of years, some young giants in the 
so-called technology fields, such as Google, have begun 
to invade traditional industries.
The prospect for the foreseeable future, therefore, is 
a near-stagnation of productivity and wages, a deficien-
cy of engaging work, and weak employment – similar 
to Europe, but not as severe as long as new industries, 
with their new products or methods, are conceived, de-
veloped and some are successful.
Now, in early 2015, America has achieved the sem-
blance of a recovery. A rough recovery from a crisis 
is a natural result of a bulging shelf of new ideas still 
unexploited and the accumulation of retained profits 
waiting to be invested. Recent data put the unemploy-
ment rate at about the level of 1995-96 – after the re-
cent recession and before the internet boom. We could 
even go as far as to say that a boom is going on – in the 
midst of long-term stagnation – thanks to the innova-
tion called “fracking” and to the flight of capital from 
Europe and elsewhere, which has made it easier for 
investing and innovating to obtain finance. Yet labor 
force participation has plumbed new depths, growth of 
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Cover 
real wage and productivity remains meager and no rise 
in job satisfaction has been reported. 
Much ink has been spilled over the Keynesian thesis 
that it was a rejection of “fiscal austerity” that enabled 
the American economy to “recover” while Europe did 
not. But there has not been much in the way of per-
manent increases in government expenditure in the 
aftermath of the financial crisis, only a welter of tempo-
rary spending measures now generally expired; and no 
permanent tax cuts. Quite the contrary, many tax rates 
were increased and huge numbers of government em-
ployees were terminated until the public payrolls were 
leaner than before. Furthermore, it is quite possible 
that we shall see the boom peter out – that the boom 
will end in a year or two, just as all booms do.
China’s economy
We all know that China through a combination of 
trade, investment, relocation of labor and “transfers” 
of technology from abroad has achieved a stunning 
wage growth, better jobs and higher employment. But 
it should be clear that these avenues for continued eco-
nomic growth go only so far. Efforts along these lines 
are running into diminishing returns.
The economy will have to offer much broader oppor-
tunity for work that is stimulating and fascinating – for 
mass flourishing!
For both these reasons, China will soon be in the 
same situation as Europe and America are. It must 
begin to find ways to expand its indigenous innovation 
from the elites in the tech industries to all kinds of in-
dustries and all sorts of people down to the grassroots 
of society – just as Europe and America must do if they 
are to regain wide prosperity and mass flourishing.
What is required? Boost the enablers of innovation 
such as education. Boost the dynamism for innovation 
by removing the inhibitors created by traditional cul-
tures. And remove the blocks like social protection and 
smothering regulations.
It is clear that the Chinese want to aim for precisely 
that – for grassroots innovation and what they call 
“self-development.” Most Americans do too. We will 
have to see what the Europeans want.
Edmund Phelps 
The 2006 Nobel Laureate in Economics; Director, Center on 
Capitalism and Society, Columbia University; Dean, New Huadu 
Business School; Author of 
Rewarding Work (1997) and Mass 
Flourishing (2013)
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