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Joel Kotkin, hardly a wild-eyed libertarian, has an interesting response to the White House’s new plan to force corporations to pay higher wages:

From health care reform and transportation to education to the environment, the Obama administration has—from the beginning—sought to expand the power of the central state. The president’s newest initiative to wrest environment, wage and benefit concessions from private companies is the latest example. But this trend of centralizing power to the federal government puts the political future of the ruling party—as well as the very nature of our federal system—in jeopardy.

Of course, certain times do call for increased federal activity—legitimate threats to national security or economic emergencies, such as the Great Depression or the recent financial crisis, for example.

Other functions essential to interstate commerce—basic research, science education, the guarantee of civil rights, transportation infrastructure—as well as basic environmental health and safety standards also call for some federal oversight. Virtually every modern president, from Roosevelt and Eisenhower to Reagan and Clinton, has endorsed these uses of centralized government.

But what is happening now goes well beyond the previously defined perimeters of the federal government’s powers. Obama seems to possess a desire not so much to fix the basic infrastructure of the country but to re-engineer our entire society into the model championed by liberal academia.

There also seems to be a conscious design to recreate the country as a European-style super-state. Forged by an understandable urge to minimize chaos after a century of conflict, the super-state generally favors risk management through centralization of authority. This has traditionally been accomplished by ceding regulatory powers to national capitals, though lately more and more powers have been ceded to the European Union.

Initially the administration had hopes of imposing similar controls through acts of Congress. However, with the shifting political mood, this seems less and less possible. With its latest action the administration sends the message that it will now impose the desired results through the bureaucracy. Under the proposal, private firms that do not raise wages will be bullied into doing so through the manipulation of federal contract awards.

This marks a departure from our basic traditions. For most of our history the burden of expanding opportunity has rested with the private economy, albeit in conjunction with often necessary protections for workers and consumers.

Now the overall control of the economy is shifting to Washington—from government contracts to ownership shares in companies like General Motors and much of the financial sector.

This new order would transform the very nature of American capitalism. Now the economic winners will not be those working for the most agile or profitable companies, but those who gain the blessings of the federal overlords. In some senses this extends the corrupt, largely failed political economy of Chicago politics to a bastard American form of French dirigisme.

I don’t want to use this space to plug my book (though I will!), but this is precisely the sort of thing you would expect from a bunch of intellectuals so comfortable with progressive-style corporatism. The problems with all of this should be obvious to folks around here: Big business serves as government by proxy. Successful businesses are those that satisfy politicians, not consumers.

What’s most worrisome is that once you create this sort of system, it will be very difficult to unravel. Lobbyists will get into it like ants at the picnic. Just look at how difficult it is to fire bad teachers or cross government labor unions now (See: California). Now imagine if nearly one-fourth of American workers are sucked into the new politicized economy.

Ira Stoll has written a thoughtful and fair review of From Poverty to Prosperity. He is rightly critical of areas where we weren’t thorough enough or were overly general (in particular, his points about deposit insurance and the way in which religion does or does not act as a brake on innovation). But he also grasps the essence of the book and what’s novel about it; and I was particularly pleased to see this comment:

If more taxpayers read this book they’d be better prepared to vote for policies that keep America a place where workers become more, not less, productive, when they arrive here from their countries of origin.

That’s one aim we had with the book and it’s nice to see a smart reader appreciate that. Also, I highly recommend Ira’s book about Sam Adams (the man, not the beer—although both are national treasures).

Arnold adds that Bob Litan has been saying some interesting things about the present state of American capitalism (or is it Chinese capitalism?):

Unfortunately, the United States now finds itself uncomfortably straddled among the entrepreneurial, the big-firm and the state-guided categories. We weren’t state-guided until about a year or 18 months ago, when our banks were forced to take government funds. And now, regrettably, our banking system bears an uncanny resemblance to the Chinese system of five years ago, before the Chinese privatized their banks at our behest to get into the World Trade Organization.

Eric Falkenstein has written a couple of thoughtful posts about the new Kling and Schulz book From Poverty to Prosperity. In his latest, he pours some cold water on one of the thinkers whose work we discuss and whom we interview in the book, Paul Romer.

Then Romer seems really happy about noticing that productivity is not merely more stuff, but stuff differently arranged. He notes there’s a machine that using carbon, oxygen, hydrogen and a few other atoms that is smaller than a car, renews itself, fixes itself, and creates valuable output. What is it? A cow! See, all we have to do is arrange atoms into cow-like things, and the future of robot maids, jetpacks, and holodecks will finally arrive. I don’t see this kind of insight rising above the fantasies of your average comic book reader.

I see what Erik is saying, but I think he misses the point. Romer is trying to jar people’s imaginations to get them to think about rearrangement and recombination in the context of innovation and technical change over time. I happen to think it works. The cow analogy may not do much for Erik, but I suspect that’s because he’s one of few people who for much of his adult life has thought deeply about the economics of technical change.

Much of the recombination Romer talks about will always be hidden or invisible to people. And yet even though we don’t see it, it is profoundly important, it’s happening all the time and it’s happening more frequently in some places than others. These small, subtle but persistent tweaks to existing matter and arrangements add up a lot over time. And we should spend a lot more time thinking about the institutional mix that promotes this dynamic since it’s what drives new technology and resultant productivity growth. To that end Romer’s work is critical for understanding which countries are at the technological frontier and why.

Falkenstein says “Romer’s big idea seems best addressed by much less mathematical analysis; his model is sterile when applied to the real world.” I don’t think Romer would claim his model is the sum total of his thinking, and he’s spent a lot of time on less mathematical analysis of the same problems. But he is an economist and I think he’d say building the model helped refine his thinking about growth over time.

Either way, my sense is most people who come across Romer’s work don’t look at the world the same way afterwards (and don’t think of the history or future of technological change in the same way). That’s a huge achievement.

One of the major themes of From Poverty to Prosperity is that intangible assets (such as culture and laws) can matter much more to economic success and growth than visible, tangible assets—land, labor, machinery, and the like. This is true for countries and regions—and even individual firms.  A good example of this can be found at 3M, where I spent some time earlier this month with other folks who study innovation. Jeffrey Phillips was on the trip and made the following observations:

3M’s model is distinctively upper Midwestern—built on the concept of working together for the common good of the firm and the employees. The original founders embedded much of this philosophy, which was extended by William McKnight, who encouraged his managers to allow employees to experiment, to define the best way to do a job, and to tolerate mistakes…

Some of the other factors that sustain an innovation culture are also aspects of the Midwestern, rural roots. There’s a focus on individual initiative, which encourages people to identify opportunities and create solutions, and a “barn raising” mentality which encourages people to help each other with projects… Finally, the evaluation criteria for most people encourage working together and solving problems across geographies and product lines. These collegial attitudes, low personal aggrandizement, and attitudes to sharing insights and information rather than bottling up information in rigid silos creates an internal innovation community spread across geographies and over 40 different core competencies. With a powerful informal network, the conditions are ripe for innovation.

When pundits in the popular press talk about innovation they frequently mention Google or Apple or other Silicon Valley–based innovators. And those are great innovators in a highly dynamic region. But cultures of innovation and economic success can be found elsewhere, and such a culture seems particularly strong in the Minneapolis area that 3M calls home (as do Target, Cargill, General Mills, and many other highly innovative firms). A nation’s economic success is largely a product of similar kinds of vital intangible assets and policy makers would be wise to spend more time studying and bolstering them.

The other major publishing event of the year is happening this week. Arnold Kling’s and my book From Poverty to Prosperity will be out in stores. Arnold describes it as “intellectually heavy” and “not the sort of thing that can be digested in a single plane ride” (in our view that’s a feature, not a bug). Simon Johnson, who kindly blurbed the book, describes it as for anyone seeking “compelling visions for the future.”

Just this morning David Brooks laments that America seems to have lost its love affair with the future, and I agree that there’s a palpable sense throughout the political culture of limits and decline (there’s a reason people keep comparing today to the ’70s). But the thinkers we discuss in this book have not at all given up on the future, and the ideas we advance constitute a compelling case that you shouldn’t either.

I had the good fortune to spend time recently at the 3M Innovation Center in St. Paul, Minnesota. I’ll have more to say about 3M in subsequent posts, but what is most striking is that this 100-year-old firm has managed to avoid the pitfalls that harm many established firms that rely too much on legacy assets and fail to push innovation fast and far enough. 3M’s secret is empowering their scientists, engineers and marketing talent to be entrepreneurs from within.  Failure is tolerated, even expected, as part of the innovation process. It was very much in keeping with Brian Carney’s tremendous new book Freedom, Inc., in which Carney argues that successful firms can free their employees and allow them to chart the way to greater productivity and profits.

On a lot of important measures of prosperity, India tops China these days. See my column in Mumbai’s MINT newspaper for more.

Dan Akst chats up Michael Winerip’s terrific piece on a 58-year-old formerly highly compensated executive named Michael Blattman who can’t find a job. Dan (who has written for us here and here) believes this episode says a lot about our current economic predicament. And I think he’s right. When considering Blattman’s plight, it’s hard not to wonder what would help him.

Longtime readers of this blog know that I’m obsessed with entrepreneurship (there’s a chapter on it in my forthcoming book) and the hope for the Blattmans of the world—or, for example, the KC Star writer Mike Hendricks who was found job hunting here—is an economy where entrepreneurs can sweep up obviously talented folks such as Hendricks or Blattman and redeploy them in new ways. One of the frustrations of the current economic discussion is how little attention is paid by the White House and Capitol Hill to sustained growth driven by entrepreneurship. Without it, Blattman, Hendricks, and others will be job hunting for a long time.

The Taxpayers Alliance, an organization well-known here in London for getting its limited-government, lower-taxes agenda into the media and in front of politicians, released a new report, “Tax and Entrepreneurship,” this week.

The report calculates that under the UK’s current tax regime, marginal tax rates on entrepreneurs are so high that over 35 years, one invested British pound would only yield £2.68 compared to a pre-tax level of £28.10. The report calculates the current marginal tax rate on entrepreneurs at 90 percent, which will rise to 92 percent when the rate on top earners increases next April from 40 percent to 50 percent. In other words the tax increase will carve off another 20 percent of what is currently left over after the marginal rate does its dirty work.

The report raises a question that is relevant in leading developed nations such as the U.S. and UK right now: how far can we push the entrepreneurial class? When will the cost of starting and running an enterprise become so unappealing for so many that they will choose a “safe” job instead and thereby weaken an entire nation’s innovative edge?

No one knows the exact answer. And yet given what we know about the contribution of new enterprises to growth, it is surprising how little attention the enterprising class receives in public debates about the effect of policy choices (such as saddling tomorrow’s workers with massive debt or taxpayers with $1 trillion in new healthcare spending).

The preface to “Tax and Entrepreneurship,” written by entrepreneur and investor Julie Meyer, makes a few claims that should prompt policy makers and researchers to ponder:

We are fortunate that there exists that class of people . . . who are prepared to live abnormal lives in the bringing to life of their vision of the world, their products and services. Greatness drove them, not work life balance. They sought excellence, profits, and transparency, and made the impossible inevitable . . .

Many of us wouldn’t claim to call ourselves entrepreneurs, but we are part of a trend of what I call, ‘Individual Capitalism’—where the unit of business has shifted to the individual away from company man. No one under 30 that I know wants to work for anyone anymore . . .

Entrepreneurs instinctively shrug their shoulders when it comes to matters of government bureaucracy and tax.

Two interesting questions arise: Are entrepreneurs driven more by personal ambition and the culture out of which they grow than by tax policy and bureaucracy? Are we seeing a trend toward the “individual capitalist” that is driven by generational and technological change that is more powerful than any anti-entrepreneurial policies a government could reasonably enact?

One assumes that an enlightened liberal response would be “yes” to both questions—enlightened because any thinking liberal knows that the engines of growth need to keep firing to pay for new healthcare programs and the like. Conservatives and free-marketers, of course, would more instinctively say “no” to both questions. It seems clear at first glance that more entrepreneurship happens in the U.S. than the UK, and more in the UK than in France, because of tax policy and bureaucracy. But it also seems clear that below the national level, at the individual level, we don’t actually have a very good understanding of how the entrepreneurial class responds to policy.

Ryan Streeter is Senior Fellow at the Legatum Institute.

Paul Kedrosky talks up an interesting new NBER paper on patent pools and their effect on innovation:

Contrary to tragedy of the anti-commons theorizing—the idea that too many people with rights to exclude others from a market will cause less innovation—it seems that, in this case, eliminating market ticket-takers meant that the resulting economic show was worse.

Skepticism of the merits of strong intellectual property protection is on the rise in Washington (there are both ideological and commercial resons for this). This paper shows how our understanding of the link between IP protections and innovation continues to evolve in surprising ways (something that is not surprising to IP scholars such as Will Baumol and others but may be to folks on Capitol Hill and in the White House who believe a weakened IP system is a no-brainer).

Re: my earlier post on Steve Levitt, reader Daniel Elmore writes in and says I might be mistaken:

Levitt wasn’t surprised that a believer in markets can care about alleviating poverty. He was surprised that Becker would say that “to understand and alleviate poverty” was the answer to the question of what he thought the “only purpose of economics was.” That is surprising… the most common answer to such a question, at least in academia (at both the undergraduate and graduate level) is something along the lines of “to study the allocation of scarce resources in the face of unlimited desires.”

Two things are worth mentioning in response. First, Elmore is right that this is often the standard framework for thinking about economics at the undergraduate and graduate level. And it is something Arnold Kling and I are hoping to change with a forthcoming book called From Poverty to Prosperity (look for it in book stores in a few months). Our view is that abundance, growth, and entrepreneurship do not get the attention they deserve, particularly by policy makers.

The other point is it is clear from Levitt’s comment about Becker’s political affiliation and advocacy of free markets that concern for the poor implies, at least in Levitt’s view, a certain political allegiance and a view of market economics. But most of the serious free market folks I know are what Kling calls “Bleeding Heart Libertarians” and their interest in and advocacy of free markets emerges from concerns about social justice. It is too bad Levitt would find this surprising.

The New Republic’s Jon Chait thinks concern about the potential for a one-party state in the Obama era should prompt an embrace of public financing of campaigns and other campaign finance reforms. Arnold Kling isn’t buying it here.

As a solution for the problem of entrenched political power, “public financing” and “tough reforms” are fox-in-charge-of-the-henhouse ideas. Ultimately, campaign reform gives you government of the incumbents, by the incumbents, for the incumbents.

Indeed, my colleague Peter Wallison has a new book out on just this topic called Better Parties, Better Government. Campaign finance restrictions limit competition by restricting the funds available to challengers.

What’s also interesting to consider is Arnold’s bigger point:

The traditional libertarian solution for corrupt government is Constitutional restrictions on government activity. Smaller government means smaller scope for corruption. I am not sure I believe that the traditional libertarian solution works. I suspect that what really makes for limited government is the opportunity for exit. In the early 1800s, it was possible for an American to pick up and move to a remote area where government had very little impact. That possibility tended to limit the power of the central government. I think that the big challenge for libertarians is to create conditions that enable people to exit from overbearing government . . . I think we need to boost the organizations of civil society that compete with government: private schools, private firms, charities, neighborhood associations, and groups that supply public goods using the “open source” model.

This comment reminded me of a speech by Carl Schramm I read recently that discussed the role foundations played in enlarging government during the 20th century and what role foundations might play to bolster civil society today:

In many ways, foundations taught the government how to get bigger. The Rockefeller Foundation and others pioneered the funding of university research. The Kellogg Foundation helped develop the prototype of the community college that became ubiquitous under the sponsorship of local government. And since the Great Society, some foundations have seen their role as designing pilot social-welfare programs that would then be picked up by government. The model still prevails around issues such as national health insurance and childhood obesity, and it is essentially one in which foundations act as the incubators of an ever-expanding network of government benefits.

Affluence and abundance have changed this. The future, for foundations, does not lie in the old mindset of trying to leverage government funding. It lies in finding new ways to leverage the power of entrepreneurial capitalism. Perhaps, then, foundations now need to teach government how to get smaller. We have, with foundations, established enormous pools of private wealth that could be used to create new visions of democracy, new visions of civil society, and new visions of cultural mobility. These would be centered in each case on the bedrock of the individual’s ability to create a meaningful destiny, one where personal responsibility and individual creative authenticity become the defining qualities of each American.

Is it possible to teach government how to get smaller? Arnold is skeptical, but by leveraging entrepreneurial initiative, Schramm is advocating an approach that may yield “new visions of civil society” and seems to be in keeping with what Arnold has in mind.