What’s Right, and What’s Wrong, with “What is Wrong with the West’s Economies?” by Edmund Phelps

Since the 1970’s American workers who lack a college education have fared poorly in the labor market, as their compensation has fallen in both absolute and relative terms. In “What is Wrong with the West’s Economies”, Edmund Phelps attributes these adverse developments to a significant decline in productivity growth, which in turns results from a stagnation in innovation, entrepreneurial spirit, and in economic thought. In this essay I point to a number of problems with Phelps’ diagnosis, which include a tendency to overstate the dynamism of the past and to underestimate current gains in productivity. It is not declining productivity growth, but rather ongoing gains in productivity—and, more specifically, the nature and source of these productivity gains—that accounts for the worsening condition of those at the bottom of the labor market.