The slow development of productivity is due to sluggish innovation. Economic freedom cannot guarantee a nation’s return to prosperity. A country must have the vitality of imagination and creation, which depends on profound human values. So it is imperative to carry out education reforms. Phelps holds that entrepreneurs with a higher education degree share a higher probability of success and well-rounded education would encourage more young men to go for entrepreneurship and innovations. In order to kindle their desire for imagination and innovation, the education system has to expose students to humanities, and literary classics should be offered to them in high schools and universities in western countries. Humane values should be passed down to the young generation and give them the guts to work for imagination and creativity and encourage them to pursue this kind of economic model.

Get out of the doldrums: Supply side, Demand side, or Innovation side?

Confronted with the accumulation of wealth in developed economies, lack of rise in real wages and the drop of employment-to-population ratio, scholars who are in support of supply-side reforms believe that lowering the tax so that to improve the income and create more jobs is the solution while for those who are in favor of demand-side reforms think that government measures are the only way to promote employment when spontaneous demand and the employment rate are on the decline. In this regard, Phelps notes in Supply Side, demand side, or Innovation Side? that neither of the two opinions truly understands what are real economic growth and recovery,  nor do they understand that falling productivity is caused by weakened innovation.

He is convinced that when impacted by the shrink of demand, normal economies would react in two ways. On one hand, they would adapt to the new opportunities, which means new business models would turn up, complementing or replacing the old ones when the scale of the existing corporations begins to shrink. On the other hand, they would strive for indigenous innovation, which means some of the laborers who are supposed to become employees would start their own businesses when some companies stop staff recruiting, and this would gradually bring about new investment. On the contrary, stimulus policies with the goal of full employment would discourage innovation and reduce the potential for future employment and growth. When innovation is restricted, the rise of public or private investment boosted by whether the supply side or the demand side will only lead to diminishing returns.