So what is corporatism all about anyway?

The conversation between SaKong Il and Edmund Phelps touched on a wide range of subjects across the United States, Europe, China and Korea. It was hard to believe Phelps is 82 years old because of his passionate responses. During the interview, his firm faith in innovation as the key to prosperity was evident.

Phelps said Europe has been unable to emerge from the global financial crisis since 2008 because of a lack of innovation. According to his argument, the United Kingdom has not been able to see enough innovation ever since the World War II and Germany hasn’t seen the kind of productive innovation it saw in the 19th century. What stopped Europe’s innovation? Phelps pointed to widespread corporatism as a major cause.

Corporatism results in limited competition as employers, labor unions and other social groups agree to cooperate as they pursue goals of employment and growth. It was an economic model that gained a lot of attention after northern European countries saw such partnerships among the governments, employers and labor unions in the late 1970.

Phelps said excess corporatism in a society over a long period puts a dent in economic growth potential. The problems of corporatism are not simple, he said. “Zombie” corporations that have lost a competitive edge barely make ends meet, while the government is shouldered with growing debt. Inequality in wealth also becomes a serious issue. That is because interest groups and people with vested interests tend to protect their wealth and privileges by influencing government policies.

But Europe is not the only case. Innovation started to decline since the late 1960s in the United States as corporatism grew stronger, Phelps said. In his book entitled “Mass Flourishing,” the economist argues that innovation by normal people is an engine for economic prosperity. He published the book in 2013 when he was 80. The idea was well received by Chinese Premier Li Keqiang.

Phelps won the Nobel Prize in 2006 with his development of a natural rate of unemployment that proved Philip’s Curve, showing that a reverse correlation between inflation and the unemployment rate was wrong. His theory is that monetary policy cannot change the long-term unemployment rate. It suggests central banks around the world focus on stabilization of inflation rather than easing of monetary policy.

BY LEE SANG-RYEUL [ssh@joongang.co.kr]