Will "Creative Destruction" Save the U.S. Economy? (February 8, 2007)
The topic of a politically powerful minority raking off oversized benefits from the public at large drew this commentary and recommendation from knowledgeable reader Peter on the fascinating work of American economist Mancur Olson: (emphasis added)
The central argument is, a minority group can find it to its advantage to impose on society as a whole costs which are many hundreds or thousands of times the benefits the group itself gets.In other words: periods of peace enable political and financial stultification. One of the glories of Capitalism, we're often reminded by pundits, is Creative Destruction, in which industries (such as buggy whip manufacturers) are destroyed in favor of more productive and therefore more profitable industries (such as the auto industry). Similarly, when foreign producers make a product so much cheaper than domestic companies--hey, it's Creative Destruction. The workers in the old industry lose, but the consumer wins. The only way to keep an uncompetitive industry (such as the British auto industry in the 1960s) alive is with subsidies which eventually impoverish the entire nation.
So will the U.S. economy--engorged by debt, run by spendthrift wastrels, and slowly slipping toward recession--benefit from some Creative Destruction? Many look at the coming recession with fear, as if the collapse of the debt and derivatives bubbles will launch an avoidably awful time. It will undoubtedly be painful, but perhaps the best analogy is the forest, where all attempts to forestall fires simply guarantee a massive, uncontrolled blaze which burns all the deadwood and underbrush.
Once the fire has burned all the deadwood, then a true rejuvenation begins. Until then, the inevitable firestorm's delay only burdens the forest with heavier loads of unhealthy dead underbrush and branches. The instruments and debt of financial speculation are the deadwood which must be burned to ashes before the economy can return to health. I may have misunderstood Olson's concepts in proposing this analogy, but it has a certain logic--the logic of "the business cycle," in which unsupportable debt is blown off and consumers save up capital rather than borrow and spend it.
Thank you, Peter, for introducing me (and hopefully you, dear reader) to a key series of insights. Here are two of Olson's best known books (as yet unread by me):
Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships
The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities
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