The Dynamism of Nations: Toward a Theory of Indigenous Innovation
Authors: Phelps Edmund 
Published: September 2023

In this essay, 2006 Nobelist Edmund Phelps expands upon the ideas about innovation and creativity he introduced in his 2013 book Mass Flourishing. Phelps argues that while economies have continued to evolve, the concepts in economics have lagged behind.

In standard economic models, the reward for work is fundamentally the market wage. There is no room for any human agency by which a person might gain rewards other than the going wage. Thus, standard models miss the character of a modern economy.

The treatment of “innovation” is especially lacking. Standard economics uses the word “innovation” to denote a shift in a “technology” parameter. Yet these parametric shifts are exogenous to the economy–not new products or new methods conceived in the economy, thus endogenous to the economy.

Western nations that have gone from brilliance to very slow growth have little idea of how to redevelop the old élan of their best decades. With only the standard toolkit, economists may offer relief from some of the symptoms of the illness, but not a cure. Standard economics cannot cure the illness because it cannot know the causes.

The critically missing element in standard economics is indigenous innovation. This refers to new ideas not just to adaptations.

A great many businesspeople take the view that a company “innovates” when it detects and acts on a new opportunity–one that fills a need. But the concept of an indigenous innovation–a new idea that brings new practice–is miles away from the concept of detecting and acting on an opportunity that brings new practice.

Indigenous innovation, where it occurs, is driven by people's creativity. Innovators use their imagination to conceive of new products or methods and their ingenuity and savvy to implement the new product or method, that is, to make it and market it.

New ideas are not the same thing as science. Science does not tell us whether there will be a market for any of the new possibilities; business knowledge is indispensable here. Even in Western countries, myriad business discoveries may have led to as many new products and methods as from scientific discoveries between the 1820s and 1960s.

Phelps believes the “spirit” of dynamism derived from modern ethical values including individualism, vitalism, and selfexpression. They also include what Phelps calls “visionaryism” or the desire to create entirely new things.

Modern societies developed as the result of these modern values. And where these values reached a critical mass, modern economies sprouted up which brought mass innovating and thus rapid economic growth. The dynamism also enriched work. Ordinary people had engaging employment and most of them prospered and many flourished.

Phelps sees several causes for the loss of dynamism, particularly regulation and what he calls “social protection.” He is not referring to social security but to efforts to inhibit change. Not only does social protection stymie potential agents of change on the outside (e.g., by blocking potential startups) but CEOs who might have been innovators are reduced to being lobbyists and rent seekers. He thinks the private sector may also suffer from “decadence” including corruption, weak governance, and short‐termism.

Phelps refers collectively to the old values opposing modern values as “corporatist values.” Now pervasive in all the nations of the West, corporatism is behind the selfserving vested interests, clientelism, and cronyism.

Two propositions follow from this assessment:

1. Nations that lack the dynamism for mass indigenous innovation will not achieve the prosperity of which modern economies are capable. “Reform” will be fruitless without the right culture. It will be necessary to bring back into schools and the home the literature of adventure and exploration.

2. The once‐dynamic nations of the West cannot regain the stunning indigenous innovation of the 19th and 20th centuries without first doing battle with corporatist values. Western nations will have to reassert the modern values.