"Creative Destruction and the Global Economy"

Sydney M. Williams

Thought of the Day

“Creative Destruction and the Global Economy”

June 23, 2011

One cause of the current financial malaise that has infested our economy is that we have become victims of what Joseph Schumpeter called creative destruction. Professor Schumpeter referred to businesses and the way in which advances in technologies outdated existing modes; if managements did not adopt they died. Companies experience a cycle of life – from concept to birth, through adolescence, maturity, old age and death. Societies and countries are subject to similar influences.

To remain in the game, a country (or a company) must constantly reinvent itself. However, as a society becomes wealthier, the people become increasingly less willing to take risk, to adapt. We become caught in a web of comfort. The United States, historically, has had an advantage over other countries in its immigrant population. Most commentators comment on the importance of attracting the educated and the wealthy, and that should be a focus. But it is also critical to let in those that are poor, uneducated and hungry; for those are the ones who are motivated by the possibilities our country offers. They are willing to do the kind of jobs too many Americans find are beneath their dignity. Yet, those are the very jobs most of our ancestors were pleased to accept. When I read or hear of our nativist attitudes toward the millions of illegal immigrants who, at great personal risk, have crossed into our country from Mexico, I cringe. It is not that I favor breaking laws, I do not; but I do know that if we are not shaken from our lethargy we will wither and die.

As Bill Gross of PIMCO wrote recently in a fascinating piece, “School, Daze, School Daze”, we have ceded manufacturing “to China and other developing labor markets.” “Labor,” he writes, “is much more attractively priced over there than here.” A hundred years ago, textile mills moved from New England to the South, as northern labor priced themselves out of business. Many of those mills in New Hampshire, along the Merrimac and Contoocook Rivers, when I was growing up were empty, forlorn relics of a bygone age. For those who could not (or would not) adapt, poverty became a constant companion. In time, software engineers and internet entrepreneurs began to inhabit space previously occupied by women and men working long shifts on looms and spinning wheels; life adjusted.

There are those, like unions, who would have us turn inward; hence the delay in getting the President to push forward on free trade agreements with South Korea, Panama and Colombia. But, as the 1930s and Smoot-Hawley taught us, it is trade, not isolationism, that works.

As a country, we are either New Hampshire at the turn of the last century or IBM in 1991. We cannot afford to wait several decades, as New Hampshire did, for people to adapt. We must be more like IBM, when Louis Gerstner arrived as CEO in 1992 and shook the place up. Mr. Gross, in my opinion, is correct in that the long-term answer lies in our attitudes toward education and training. Other than providing young people four years in which to “grow up” and keeping them off the unemployment roles, most graduates emerge with a degree, but not much better educated than when they entered. Even worse, they have not learned the skills allowing them to compete in a global environment. In a society that glorifies wealth and personal possessions (see Tuesday’s New York Times article on the City’s new Core Club,) people look down on technical schools and apprenticeships, yet it is exactly those types of training programs that are needed.

Bill Gross’s short term answer: “Government must temporarily assume a bigger, not a smaller role in this economy.” Perhaps, but in past crises government was not in this deep a deficit hole. “There’s a longing,” as Michael Barone wrote in yesterday’s Wall Street Journal, “on the left for the golden years of the 1940s, ‘50s and early ‘60s.” Big government, big companies and big unions dominated the economy. Incomes were more evenly distributed, and people had confidence in the wisdom of government and business leaders. That “Midcentury Moment”, as Mr. Barone calls it, has remained embedded in the memories of many Democrats who hope we can return to those “golden” years. However, as Thomas Wolfe wrote: “You Can’t Go Home Again.” Not only can’t you, you don’t want to. As Mr. Barone explains, those years were characterized by a uniform conformity that produced the “organization” man. Segregation was rampant throughout the south. Women were denied the right to work in many organizations. It was only the ending of the “Moment” that ushered in the civil rights movement and equal rights for women, along with declining union memberships and rising entrepreneurships.

Public jobs focused on infrastructure and other projects may be a short term answer. But it is not the answer. Certainly our roads and bridges are in terrible shape; so putting out-of-work people fixing in-need-of-repair roads and bridges would provide needed jobs. But a focus on Green energy, for example, should become simply a focus on energy.

The problem we face is unlike anything we have known, and the shift we must make is cultural, not just economic. Our competition is global. Workers in places like China are qualified and are willing to work for less. The very size of our federal debt prevents government from providing the type of solutions enacted, for example, in the 1930s. We cannot even agree to discuss entitlements that we cannot afford. The complexity of our tax system means that it benefits only the very wealthy and the country’s largest corporations. (It is ironic but not surprising that President Obama’s closest business advisor, Jeffrey Immelt, is the CEO of a company that paid no corporate taxes last year and whose workforce has not expanded in twenty years.) American companies have $2 trillion parked overseas, yet our tax system prevents its repatriation. And excessive regulation acts as a drag on the economy.

Our schools are inadequate for the world in which we live. Mr. Gross wrote of colleges, but the problem begins in our elementary schools, which are overloaded with staff and not teachers, schools which are run for the benefit and well-being of those who work there, not for the students who are there to learn. The concept of universal moral standards (ala James Q. Wilson) has been relegated to some dusty closet. We deify the wealthy on TV and in the Press. We have inculcated the people with a sense of something for nothing. Lawsuits have become commonplace. Lotteries have become ubiquitous and encouraged by politicians of both parties, yet the tax they extract is regressive and we hear no complaints.

The story of our economic success has been the story of individual initiative, creativity and entrepreneurship. It would have been impossible for most of us four decades ago to foretell the type of economy we live in today. In the same vein, the future is not foreseeable. President Obama’s observation that technology causes job losses is wrong. Creative destruction permits the birth of new industries and jobs. Just because we cannot know what those jobs will be, does not mean they will not exist. Out of chaos comes opportunity. It just has to be encouraged.