News & Analysis
Falsity of Creative Destruction
From the Ashes ... The most dynamic economies rely on creative destruction to grow. As the world continues to recover from the Great Recession, governments and businesses are focused on how to spur economic growth. But if they really want to create jobs, raise incomes, and lift living standards, they should From the Ashes ... The most dynamic economies rely on creative destruction to grow. As the world continues to recover from the Great Recession, governments and businesses are focused on how to spur economic growth. But if they really want to create jobs, raise incomes, and lift living standards, they should devote more energy to figuring out how to generate economic dynamism over the long term. At times like this, governments tend to champion particular sectors like manufacturing, or industries like green technology. But true dynamism flows from continuous innovation, experimentation, adaptation, and change, all of which raise productivity over time. Those productivity gains, in turn, lift incomes and drive consumption. This fuels more innovation—and a dynamic economy thus expands in a healthy, sustainable way. Unfortunately, economic dynamism can also cause dislocation and turmoil as workers lose jobs in failing companies or in fading industries. Change in the ranking of companies has accelerated in many countries, including the United States, over the last century. The 90 names listed on Standard & Poor's index of major U.S. companies in the 1920s remained there for an average of 65 years. By 1998 a company listed on the S&P 500 could expect to stay there for an average of only 10 years. – McKinsey Institute, Newsweek
Dominant Social Theme: Capitalism constantly reinvents itself.
Free-Market Analysis: This is a very interesting article that appears in Newsweek by James Manyika, Susan Lund and Byron Auguste. Manyika is a director of the global management and consulting firm McKinsey & Co, (Newsweek tells us), and of the McKinsey Global Institute, where Lund is the director of research; while Auguste is the director of McKinsey & Co.'s social-sector office. From our point of view, the article espouses a kind of dominant social theme – that the Great Recession and the pain it is causing is part and parcel of the natural evolution of capitalism.
While an Austrian analysis would arrive at much different conclusions in our view, The McKinsey article does make use of a quasi-free-market oriented perspective which is obviously Schumpeterian. While Joseph Schumpeter can certainly be seen as something of a free-market economist, his theory of capitalism departed considerably from the monetary emphasis of more mainstream free-market analysis offered by the Austrians of his day. (His lifespan spanned the first part of the 20th century and he taught at Harvard.)
The von Mises Institute tells us this about Schumpeter: "He ... aspired to be the greatest economist, lover, and horseman in the world — but then would add that he was having trouble with the horses. Although he was of Austrian descent and was a student of Eugen von Böhm-Bawerk, Schumpeter cannot be considered part of the Austrian School. He never opposed government intervention like his classmate Ludwig von Mises."
Schumpeter, apparently, is continuously cited by current economic heavyweights in the West, especially in Washington DC. Here is an excerpt from a bio in Wired magazine (2002) giving us some insight into his continued popularity. "In a paper presented at a recent Fed retreat, former treasury secretary Lawrence Summers and his ex-deputy Bradford DeLong observed that 'the economy of the future is likely to be "Schumpeterian,"' with creative destruction the norm and innovation the main driver of wealth. Products based on ideas – music, software, pharmaceuticals – require an enormous investment to develop but very little to keep making. And they're often subject to network effects, which reward those that achieve critical mass. Together, these factors – high cost to create, minimal cost to produce, and a winner-take-all environment – tend to generate natural monopolies, at least until the next innovation comes along."
The article itself may be seen as partaking of the above point of view. It postulates that the current pain that Western citizens are feeling as a result of the Great Recession and government "austerity measures" are part and parcel of dynamic capitalism. The trio also have a well-defined idea of what makes a successful Western nation-state, one that it presented toward the end of the article:
How exactly do we foster economic dynamism? Twenty years of McKinsey Global Institute research shows that the mix of sectors within an economy explains very little of the difference in a country's GDP growth rate. In other words, dynamism doesn't turn on whether an economy has a large financial sector, or big manufacturers, or a semiconductor industry, but instead on whether the sectors are competitive or not. Instead of picking winners and funneling subsidies to them, countries must get the basics right. These include a solid rule of law, with patents and protections for intellectual property, enforceable contracts, and courts to resolve disputes; access to finance, particularly for startups; and an efficient physical and communications infrastructure.
From our point of view, the argument being espoused here is convenient for those who want to explain the current economic disaster in terms of creative destruction rather than monetary failure. Schumpeter, of course, was knowledgeable about Austrian monetary theory and business cycles. But somehow he didn't see the need to apply business cycle theory to his perspective on how economies work, preferring to focus on the entrepreneur as his agent of creative destruction. He also believed that ultimately capitalism was doomed to turn into socialism as a result of governmental interferences, but that part of his vision is not convenient to the argument being postulated by McKinsey and Co. writers.
This article takes an economic theory and applies certain parts of it to modern circumstances to come up with a justification for the current economic disaster. By focusing on creative destruction, the article does not have to deal with the overwhelming monetary failure of central banking that brought the West to this place. That is also, probably, why Schumpeter is popular with the bankers at the Federal Reserve. He provides them with a template (if they massage his perspectives) that allows them to avoid talking about the monetary disasters that they tend to inflict upon the world.
Not only does the article use Schumpeter's theories to disguise the failures of central banking, it then proposes the predictable statist nostrums when suggesting what is necessary for success in the modern era. Patents, of course, are a government-created entrepreneurial status; meanwhile, the "solid rule of law" would tend to revolve around Western monopolistic legal practices in which the laws, judges, prosecutors and prisons are all run by the same authorities, leading to conflicts of interest and abuses.
Finally, the article suggests that "access to finance" is important. The reference here is to Wall Street and other financial centers. As we have pointed out in past articles, such financing mechanisms are essentially statist in the modern era, with winners and losers being sorted out not by the government but by power elite elements that have inserted themselves into an increasingly mercantilist marketplace.
What we have then in Newsweek is an article that misrepresents a man and his economic theory in order to try to divert attention away from the monetary failures of the central banking business cycle. Further, the solutions offered by the article are predictably statist and partake of the same failed authoritarian model that has brought us the current misery.
Conclusion: It is perhaps fitting that such an article should appear in Newsweek magazine which was just sold, perhaps for as little as a single dollar. While we have admiration on a purely intellectual level for the way the authors have constructed this article, it devalues truth and has found a fitting home.
Posted by Scott Taylor on 08/26/10 02:49 PM
@ Bill Ross:
"The choice is obvious: one less latte, or civilization?"
Please define your terms! Is it a really GOOD latte?...
and ... what exactly is "civilization?" Without civilization, could there BE a really good latte? Without lattes, could there really be civilization?
Sorry to be a pest but I'm having some trouble evaluating the worth of my choices....
OK,OK! I just wanted to say, all you commenters are in good form here... thanks!
Posted by AmanfromMars on 08/26/10 10:05 AM
"I read somewhere that if you begin good habits, the old habits just fade away." .... Posted by Weeble on 8/25/2010 7:14:10 PM
Yeah, of course they do. And bad habits disappear too. And Life takes on a whole new meaning with fab memes to the fore.
And white man paleface speak with fork tongue, Kemo Sabe, is as relevant today as it was umpteen years ago, Weeble, whenever the Lone Ranger was riding Silver.
A toke on the peace pipe though will usually sort out the men from the boys.
And that can also blow your mind too, Bill Ross, ...... but only if you are smart enough to inhale.
Posted by Weeble on 08/25/10 07:14 PM
I read somewhere that if you begin good habits, the old habits just fade away.
Posted by Weeble on 08/25/10 02:45 PM
"Sort of mind blowing, eh?"
Posted by Weeble on 08/25/10 01:13 PM
Ooh, you could have used something other than a fission device as a metaphor. If the White Man is on your tail, gathering scalps with Chief Broken Link would be Creative Destruction of some Falsies, would it not?
Selective Construction, such as a free meeting of the minds is much more palatable to me. As long as the wagons are being circled and the intent is solely to keep them circled.
Posted by Bill Ross on 08/25/10 01:03 PM
Uncle Martin aka AMFM is simply stating that ideas are viral nuclear weapons and, the internet allows them to be easily replicated and placed for maximum effect.
Sort of mind blowing, eh?
Posted by AmanfromMars on 08/25/10 12:12 PM
What do I mean, Weeble?
Well, intelligence and/or wisdom are commodities which are freely supplied and/or developed, although whenever one requires more than one possesses oneself is it usual to acquire what is needed with any number of innovative lease purchase arrangements being available. The option though to supply what is needed for free in/on a medium such as this, to second and third parties who would be able and enabled to greatly benefit from the undoubted massive impact of something that one would be sharing, is extremely attractive, and although unusual in such modern day consumerist societies as are failing today, are at the very core of what originally created, and is currently needed today to refloat/reboot/kickstart the System.
And with IT communication being essential for the implementation of anything and everything, is a firm wide base knowledge of its digital/binary/ternary manipulation, for the greater good purpose of human perceptions management, a prerequisite for the guarantee of runaway success.
One doesn't necessarily need to know how to make an atomic device to explode one, but it does make it easier to place them where they are needed for maximum effect ...... and such is the same with novel intelligence and enlightening wisdom.
Posted by Weeble on 08/25/10 11:18 AM
What do you mean?
"Although to be perfectly truthful, those who can do such wonders/miracles can do IT so easily for free ...... and that is Real Power Virtually Supplied and over which there is No Second and/or Third Party Control."
Posted by AmanfromMars on 08/25/10 03:46 AM
"Starve 'em out! Do not fight the old failing system, create something new and more attractive, if we want to survive...You remind me of Buckminster Fuller!" ..... Posted by Liberty Belle on 8/24/2010 11:40:50 AM
Creating something new and more attractive will have the old failing system supporting you, so that they can survive ..... for there is always the clear and present danger that exposure of the systemic abuses by the Power Elite will lead to the mob, which is being educated in, and instructed about such abuses, exacting a Perfectly Targeted Just Vengeance against Corrupt Leaders/Sub-Prime Players, who would not wish for things to Change for the Better.
And there are those who are busy with just such notions and creation, which you can surely reasonably expect to be, if not beyond human ken, a tad more involved and complicated than most will ever be able to comprehend and assist.
Fortunately however does it need only a supply of pretty paper/Treasury Bills/IOUs/Gilts/promissory notes, which nowadays can be even reduced to simple credit transfers for instant artificial wealth and current power generation, to those with the necessary Super Skills/Improved Mindsets to Reverse the Decline and Fall and Initiate an Enlightening Renaissance and Systems Revival with ITs Novel Control of the Money System, which provides Manna from Heaven in its QEDesignation.
Although to be perfectly truthful, those who can do such wonders/miracles can do IT so easily for free ...... and that is Real Power Virtually Supplied and over which there is No Second and/or Third Party Control.
"I am sure it is only a matter of time before your format of having REAL, enlightened people to moderate and educate will catch on like wildfire ...
And, if the opposition tries to mimic, but with subversion, there are far too many enlightened netizens to totally decimate them." .... Posted by Bill Ross on 8/24/2010 4:05:01 PM ...... Do you think that they now realise that very simple true fact, Bill, and that they must act now, appropriately, to save their wretched skins/boney asses?
And yes, I was only joking and being sarcastic, DB, with the "Well done, the McKinsey Institute." quip.
Posted by Weeble on 08/24/10 11:20 PM
I must have got the wrong end of the stick. Sorry...
There are so many religious type here that I sometimes confuse myself as to the "religious fervor" presented. I do not keep a list, except that there is one that is always good for opening his raincoat and giving us a selection of watches to choose from.
"Her" was a small typo. I think God is a actually a hermaphrodite-like character, but that would have sounded a little odd at the time, I thought. But God has no body, so it is all a projection anyway.
All "isms" need to be watched carefully, but Capitalism is not being practiced, so that term gets a bad rap.
Getting back to Creative Destruction, they destruct (send in your over 10 year old fridge) so they can re-build (buy an EnergyStar fridge). Totally boring. Much like LED lights and those stupid compact fluorescent lights that solve no problem. They contribute 10 percent of the power load in a house. New DC motors are what is needed, but I'll be damned if they get those from me. They'll end up dropping them in cluster bombs over Iran. There's an engine of progress not realized.
My ideas are now for me until the Great Crash (except words on this site).
That is "Selective Construction" in my books.
Posted by John Danforth on 08/24/10 06:25 PM
Creative Destruction ..... like, "We had to kill them to save them"?
Posted by Bill Ross on 08/24/10 04:05 PM
@DB: "Go forth and multiply?"
Gees, I wish I had also said that...
right on the ball...
I am sure it is only a matter of time before your format of having REAL, enlightened people to moderate and educate will catch on like wildfire...
And, if the opposition tries to mimic, but with subversion, there are far too many enlightened netizens to totally decimate them.
Posted by Leonardo Pisano on 08/24/10 03:23 PM
I cannot avoid a little smirk when I hear economists talking about innovation. Usually, they haven't invented anything in their lives, and have no clue about the technical difficulties and tough design decisions related to it, as well as the difficult path to commercialization with the single most barrier convincing people that they do better with a change....
On the other side, look at all these useless gadgets that are "invented" and seducing people to buy all this stuff they can easily do without. Functionality and "added value" doesn't seem important, as long as it sells. Hey, we make the interest so low so to fuel the useless consumption machine. And when the debt has increased to insurmountable levels, a "healthy" correction is the remedy to restart the cycle. The Power Elite in this scenario can subtly pull the strings, and can control innovation (change) which is implicitly threatening to the status quo.
Posted by Ichabod on 08/24/10 03:21 PM
Thanks for the comment Weeb. But her? You didn't capitalize it so it must be a lesser God you're a child of? Forgive my dry and sometimes totally misunderstood attempt at humor.
"Fear" would be better translated as "awesome awareness." But since I'm not a Hebrew scholar with the ability to correctly translate the Hebrew scriptures, I'll stick to the studies of those who are.
The original point was about creative destruction regarding capitalism. It's nonsense to describe it so. Way off the chart and more in the perception range than truth. For capitalism to succeed best the consumer is king.
I told that to a young international student who stayed with us once. His dad was a capitalist from the Rhine area and he was in rebellion against the "dirty" business of capitalism. I have a remote cousin who felt the same way about his father's successful business. He despised it and eventually got a PhD from Dartmouth where he learned to despise everything that wasn't a form of collectivism.
Capitalism, like society, is constantly reforming to fit new economic patterns and technological progress. Out with the anvils and the old "ice box" now serves as coolers for those wonderful German dunkles beverages I enjoyed while my boots were on the ground there. So lets not accept the glamor words used by those who don't understand even the basics of economics yet try to write about it as though they had some substance.
In true capitalism there won't be any boots on the neck. Not by the president and not by the congress. In the land of the free that was once America every man with a talent could find his work appreciated enough to receive wages for it. The choice was his to pursue given an opportunity.
If the Republicans had more smarts, they would be discussing the whys of how we got into this mess. They'd have a website showing the debt explosion since Obama took office. They'd pronounce Keyenes and his theory dead. They'd call for a return to real honest money and not be ashamed of a golden rule that would include a golden standard for money. Undefiled money. Real asset backed money with no room for scheming. Money that's good as gold. And of course, some silver threads woven amongst the gold.
But then I dream. And I see Libertarians waffling and wobbling down their esoteric paths and precious few acknowledging room for a creator. Those who do that also worship the creature instead of the creator. Just like collectivists do.
Posted by Bill Ross on 08/24/10 03:16 PM
... or, follow the methodology of Jorj X. McKie, a Saboteur Extraordinary of the Bureau of Sabotage from the Frank Herbert novel "The Dosadi Experiment":
Click to view link
One of my favorite novels (have thousands) in the setting of a galactic empire where is is realized that a private function (Bureau of Sabotage) protected by law must exist to sabotage all attempts to exercise unaccountable power.
This novel also touches on "social engineering", the target of the sabotage.
Posted by Leonardo Pisano on 08/24/10 03:04 PM
Creative Destruction " is that something similar to creative bookkeeping?
Posted by Bill Ross on 08/24/10 02:57 PM
We--ll. You now KNOW that we live in an action precedes consequence REALITY. Nothing is REAL (and therefore, effective), unless it is associated with action / consequence in the paradigm of physical (natural) law.
So, consider your environment well. Analyze exactly how you may be contributing to the survival of our predators. Choose some action / inaction set with the following attributes:
a) reduces their "protection" fee
b) increases the cost of them collecting and / or existing
THEY don't have to know your trade associations. STOP using credit / debit cards or leaving any trails, apart from creating a "Potemkin" you.
You don't even have to let them or anyone know what you are really doing...
I am a bit more ambitious than most. A careful following of links on my site will take you to exactly what I am doing and explain the experiences which let me to conclude "these a**holes are going down, and I am going to do my part to hasten the process."
Posted by Hugh Briss on 08/24/10 02:38 PM
@ Bill Ross,
I am also proud to say I have completed the required reading on your website. What next?
Reply from The Daily Bell
Go forth and multiply?
Posted by CosmosPrivateer on 08/24/10 02:22 PM
"They can't hurt you too badly, because their basic meme is 'we're the good guys' and, acting too far out of their box destroys them and, thy know it."
Got to love Bill Ross, thanks for your insight and DB also.
The Control System will someday eat itself.
Posted by Liberty Belle on 08/24/10 01:23 PM
@ Bill Ross
"...acting too far out of their box destroys them and, thy know it." Precisely my point! Thanks!