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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.

The classic example I know of in Britain (apart from the Bar) was the British Leyland unions. For years everyone in Britain paid one third more than the going rate in Europe for their cars, just so we could keep those guys with their antiquated demarcation rules, making cars in the same way they had in 1952. How it worked, all company cars had to be made in Britain, which at the time was 75% of cars bought new, and the Governments of the day winked at price fixing among importers. Basically, prices in the UK were fixed at levels which allowed British Leyland to continue to manufacture.

No sooner had it been sold off to BMW than the Government started to demolish price fixing....and it went bust.

Well Olson has detailed historical argument backed by empirical evidence of the accretion of such arrangements with long periods of peace. And this sheds light on why France in the 19c could grow faster than Britain, despite the latter having 100 years of total peace, whereas France underwent several revolutions and a catastrophic defeat in war.... Compare also Germany after WWII. Or the South in the 20c.

The parallels to modern America are striking. And the link to the success of Thatcherism, despite (or because of?) a totally destructive first few years of idiotic economic policies is also illuminating.

Thought of this reading your recent columns.
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

For more on this subject and a wide array of other topics, please visit my weblog.


copyright © 2007 Charles Hugh Smith. All rights reserved in all media.

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