The hearts and minds of workers and investors...

 Robert Shiller on the key to economic recovery...

Today, after the speculative bubbles in the housing market, we are leaving a time of irrational exuberance when many people and financial institutions bet their future on speculative trading, not on genuine economic contribution. Speculation is a healthy capitalist activity, but there is a problem if it becomes a national obsession, as it did in the boom before this crisis. President Obama’s proposed “Volcker Rule,” which seeks to limit bank risk-taking, may be seen as a response to widespread disillusionment with excessive speculation.

The present mood, though, needs to be put into a longer historical context. After World War II, there was rapid growth in labor productivity until sometime around the early 1970s. But then there was a major break, roughly coinciding with three events of 1973-74: the oil crisis, a huge stock market tumble and the first significant depression scare since the Great Depression itself.

According to the Bureau of Labor Statistics, annual growth of business output per labor hour averaged 3.2 percent from 1948 to 1973, but only 1.9 percent from 1973 to 2008.

Ever since the long-term productivity slowdown became visible, the economist Samuel Bowles, now at the Santa Fe Institute, has said that its causes are to be found as much in the loss of “hearts and minds” of workers and investors as in technology.

This month at Yale, in lectures titled “Machiavelli’s Mistake,” he spoke of the error of thinking that a high-performance economy could be based on self-interest alone. And he warned of the overuse of incentives that appeal to individual gain.

The speculative boom periods that ended a few years ago carried us into such overuse, and today’s malaise is partly a result of our disorientation from that period.

IN their coming book, “Identity Economics,” the economists George Akerlof of the University of California, Berkeley, and Rachel Kranton of the University of Maryland argue that an economy works well when people personally identify with it, so that their self-esteem is tied up with its activities.

The authors emphasize this example from the military: Well-functioning fighting units have never been built on pay-for-service alone. People will sacrifice their lives if they believe in the cause and in one another.

In most civilian fields, job satisfaction may not be a life-or-death matter, but a relatively uninterested, insecure work force is unlikely to bring about a vigorous recovery.

Solutions for the economy must address not only the structural instability of our financial institutions, but also these problems in the hearts and minds of workers and investors — problems that may otherwise persist for many years.

Posted via email from Jim Nichols