The paradoxical phrase “Creative Destruction” is coming into popular use. Let me explain why I think it’s just another nice meme, used to sell a nasty product.
The expression was coined long ago by economist, historian and social critic Joseph Schumpeter in his 1942 book Socialism, Capitalism and Democracy. Schumpeter (1883 – 1950) was raised in Austria, but moved to America in 1932, taught at Harvard and elsewhere, and eventually became a U.S. citizen. He did not experience directly the hardships of war that rocked the world during his life, which were fought in the name of competing ideologies. Democracy and its allies – in North America, Western Europe and Australia – fought all the rest – i.e. Nazism, Communism, Socialism, and various autocratic empires and religious regimes, in Russia, Western Asia, Latin American, Sub-saharan Africa, Middle East, East Asia, Southeast Asia and South Asia, with their allies.
Schumpeter was well aware of these conflicting world views, and analyzed the consequences of their perspectives. His conclusion was that every ideology – even Democracy – is subject to false interpretations and abuse in practice. He believed Capitalism (an economic methodology – not an ideology) is the best engine for societal improvement, with its ‘entrepreneurial spirit’ and its financial (credit making) aspects. Schumpeter believed – correctly, I think – that as an ideology, Democracy is hard to practice. The reason is that few ordinary citizens have the kind of knowledge needed to make smart political choices to improve society in general, rather than only for some select groups.
Many people (my ancestors included) might think Democracy is somehow bound to Capitalism by either moral or natural law. In fact, perpetuating this belief in the public mind is an effective way of justifying the unhappy results for lower class citizens caused by the successes of those at the top. It’s a belief similar to the American Dream that claims everyone has a chance to be among the winners.
Democracy doesn’t have to be wedded to unrestrained (free market) Capitalism. This is shown today by the way some political celebrities – e.g., Sen. Sanders and Rep. Ocasio-Cortez – are attracting a large following as Democratic Socialists. This change would have been inconceivable 30 years ago. Could this change be, in part, reaction to what’s euphemistically called Creative Destruction?
Schumpeter also critiqued the belief – taught as an unquestioned fact of nature – that business cycles eventually return to a state of equilibrium or stability. Hyman Minsky, a student of Schumpeter, shared his claims about stability. Mainstream economics teaches that stability is the normal condition of an economy, so long as it isn’t disrupted by ‘exogenous’ factors like wars or natural disasters or (God forbid) governmental interference. Minsky’s experience in the banking and investment sector (not some favorite theory) led him to realize that “Stability is destabilizing“.
The pragmatic and observation-based approach that Minsky learned from Schumpeter and his own experience is a major influence on Modern Money Theory (MMT). It’s a macroeconomic approach to the meaning and function of money in economies which is presently gaining congressional and mainstream attention, despite concerted efforts by orthodox economists (and the financial interests they represent) to denigrate it. One immediately obvious difference is that orthodox economists think Macroeconomics is simply an aggregation of Microeconomics, with the same fundamental ‘principles’ (actually unsupported false assumptions). The fact is that actions of large groups of consumers (aggregates) affect capitalist economies very differently from individual buying choices. Let me explain.
A clear example is the much touted (myth based) ‘principle’ of frugality or austerity tossed about during federal budget debates. Deficit spending is the bugaboo of political operatives. The claim is that if a national debt is growing, the government should cut spending. It’s said that the central government is “like a household”; it “can’t spend money it doesn’t have”. But that analogy to a household is simply false, as the article above on MMT explains. Unlike a household, a central government with “sovereign currency” – e.g. the U.S.A, Canada, U.K, Japan, Brazil, China, etc – always has money to spend whenever it decides (after fiscal debates) what projects should be funded. The funding does NOT depend on taking in enough taxes.
When any individual runs into debt, and decides to save by reduced spending (‘austerity’), her saving will have no measurable effect on the economy at large. But if masses of people choose ‘austerity’, and cut back their spending, the economy will go into decline. In such an event, government must put money into the economy to balance what the private sector has taken out.
This is because private spending is the foundation of a capitalist economy’s healthy growth. During economic downturns, such as has been the case here and in other developed economies since the global financial crisis (GFC) of 2007, central governments need to increase (not reduce) their spending, to keep their economies healthy. But in times of private sector expansion and full employment, governmental programs should be proportionately reduced, or else the competition for goods and services between the private and federal public sectors will raise inflation, which harms everyone.
Critics of MMT often politicize the discussion by saying MMT advocates are progressives, who will use their macroeconomic theories to support leftward leaning fiscal policies. Such ad hominum arguments are both logically falacious, and irrelevant. Whatever political views MMTers may have, their objective explanations of how money policies affect the economy (both real and financial), stand on their own, without any political party affiliation. As a result, press accounts of discussions and arguments about MMT typically do involve clashing ideologies, which muddy up any effort to understanding how money works.
A nice critique of economics as ideology is given by Philip Pilkington, an Irish economist, researcher and writer. In effect, he thinks economics should not be held to the same demand for exactitude and scientific rigor as chemistry or physics. ‘Doing the numbers’ is often used to give an aura of scientific legitimacy to viewpoints and assumptions that are questionable, or false, and which ignore historic facts. But however messy, economics is a still a useful tool for helping to find practical choices, for both governmental and private enterprises.
Returning to creative destruction, literally the expression makes no more (or less) sense than the expression destructive creation. On the surface, creation and destruction are opposites. Even so, ‘creative destruction’ sounds good (e.g. when we rebuild a tumbling down wall); whereas ‘destructive creation’ sounds bad (e.g. when we develop nuclear arms). Normal English usage emphasizes the adjectives in these phrases.
So in its original use, Creative Destruction emphasized the belief that in the long run, Capitalism has made useful and productive changes. There’s no shortage of historic examples. Written words seem preferable to oral traditions; printing presses are more beneficial than scribes, steam engines are more productive than horses or oxen; electricity gives more light than candles; cars transport more people farther than horse-drawn carriages. Of course the carriages, and their drivers, and horses, and manure haulers, and oat suppliers, etc. will be made redundant, but few people would think those ‘destructions’ were bad in the long run.
My own view lies somewhere between a pragmatic and ideological view of economics. My book, Inequity, Iniquity and Debt, emphasizes fiscal policies that are practical (not mathematically fixed theories) and are properly adjusted to meet actual economic conditions, in keeping with true (MMT) understanding of what experience has proven to work. But I also appeal to the need for government to provide economic justice, as a moral obligation (and as required by traditional religious rules of debt forgivenness or Jubilee).
However, I differentiate between successful efforts to improve an ‘industry’ that make an older form of that industry useless, and an effort to destroy an industry in order to advance one’s own firm, or modus operandi – with no regard for helping the economy and the country to be better off in the long run.
It seems obvious that printing presses were an advancement in public access to knowledge, even though scribes were displaced in the process. Whether digitized books are better over all for a society that once read print sources is debatable. Today we see the so-called Amazon Effect, that has destroyed many brick-and-mortar retail companies, together with jobs in the construction trades, sales clerks, security personnel, etc. Whether that is an overall benefit to our society remains to be seen. Interestingly, the decreasing value of both the printed book industry and the retail store industry are due to the same entrepreneur.
It’s often said, of these changes, ‘The people have spoken”. Certainly the general public – the ‘consumers’ – have spoken in favor of on-line products and services. BUT my closer look suggests we should be more skeptical. I think it’s illusory to say that the customers have “freely chosen” to change their current buying habits. Jennifer Cobbe deals with this question of how choices are influenced – controlled, really – in her very recent critique of surveillance Capitalism, published at Open Democracy.
Even some fully committed and successful Capitalists admit publicly that today’s version of the old system for helping society grow which made them rich has lost its effectiveness. Warren Buffett likes to say that he pays a lower tax rate than his office staff. And Peter Georgescu – 80-year-old Chair Emeritus of Young and Rubicon, says Capitalism is commiting suicide, and in the process killing the society it used to benefit.
Those who are doing well – especially Wall Street winners – will naturally say Capitalism is doing what it should, despite setbacks, and they give numbers to back the claim. Most common of these numbers is Gross Domestic Product (GDP) which measures “all goods and services”. As Mary Robinson – economist and former president of Ireland – quipped, GDP also measures “all bads and disservices”. This article explains some of the issues with the GDP meme. It fails completely to measure quality of services – e.g. whether healthy food is available in poor neighborhoods, or how long is the wait to get a doctor’s appointment. Volunteer work is ignored altogether in GDP numbers.
Most significant, GDP shows nothing about who has the wealth, because it gives per capita averages. Reporting median incomes would be more meaningful. But a truly forthright report about wealth distribution would show that in fact the poorer half of U.S. citizens have negative wealth – i.e., their debts exceed their income.
In brief, the present state of the nation is not healthy, by any serious evaluation of societal well-being. We need to learn how to measure and achieve improvements to the ‘quality of life’ that are shared more fairly (but not equally) among all parts of the society. What we have now is not Creative Destruction, but Destructive Creation. Whether it’s possible to switch back I can’t say.
For Democracy to take control of Capitalism, and use it as a tool for the public welfare, rather than the private enrichment of oligarchs who dominate today’s economy, a citical thinking well–educated citizenry is needed. Unfortunately, that seems unlikely to develop, for several reasons. First, critical thinking is not natural or easy. It takes work and practice, by students and teachers. Second, American education is rigged to favor wealthy elites, as illustrated by the recent college admissions scandal that has gone viral in the news. Third, and perhaps most discouraging, the popular media of whatever stripe reenforce whatever viewpoints and ‘arguments’ favor the current dominant money interests. Matt Bivens, a writer who gave up reporting in disgust to become an ER physician, felt compelled recently to write a witty, wry, spot-on criticism of major American journalism, on both political sides of every issue. It appears they’ve abandoned even any pretext of looking for the truth. Thoughtful readers are apt to be overcome by a string of emotions – including laughter, anger, sadness and disgust – suitable to the Tragic Comedy he depicts.