Some experts explain why all the turmoil associated with the new economy is actually good for us.
Opening Argument
It's a messy business, this new economy. And despite what our leaders say, all the turmoil is actually good for us
There are people who actually know how the modern economy works. It's just that nobody in government wants to talk to them.
Consider the story of Donald Hicks, a professor of political economy at the University of Texas. Contracted by the state to examine the past and future of Texas's manufacturing base, Hicks pored over 22 years of sales-tax returns--including those of defunct businesses, interred in a mausoleum-like archive--to trace individual companies as they made their way into and out of existence.
His most striking finding: the "half-life" of new businesses had been cut in half since 1970. That is, a group of companies founded in, say, 1985 took only half as long to have its ranks depleted by 50% as a group born in 1970 did. A process of attrition that used to take five years now took less than two.
More surprising still, the Texas city whose businesses had the shortest life expectancy--Austin--had the fastest-growing job base and the highest wages. The counterintuitive lesson: high business-mortality rates are good for economic health.
Actually, that makes sense. In the past two decades, a variety of factors have dramatically increased the velocity of the basic capitalist dynamic. The economies that succeed are those that quickly shift assets to their most productive uses through vigorous economic churning--through business start-ups and the failures that inevitably accompany them. This is what the Austrian economist Joseph Schumpeter famously termed "the perennial gale of creative destruction."
But what the Texas government really wanted to know was this: what would it take to create 3 million new jobs by the year 2020? Hicks's report offered this answer: the state's task was to produce not 3 million new jobs but 15 million new ones, because by 2020, most of today's companies will have disappeared. Rather than considering jobs a fixed sum to be protected and augmented, he argued, the state should focus on encouraging that economic churning--on continually re-creating the state's economy. To promote long-term economic stability, paradoxically, the state would have to promote constant instability.
Presented with those messy and unsettling findings, what did the state of Texas do? It decided not to release the report.
The Entrepreneur as Protagonist
This tale captures perfectly a problem that is warping the debate about America's political economy. As Regina Tracy, executive director of the Research Institute for Small & Emerging Business, in Washington, D.C., explains it: "Legislators get incredibly nervous talking about creative destruction, about the churning process. They don't want to talk about it."
We shouldn't be surprised. First of all, the case for creative destruction can't be neatly wrapped up in a 15-second sound bite. Second, no politician with even a modicum of regard for his or her political future would stand before voters and advocate economic instability and destruction. And though there is plenty of lobbying pressure to prop up "yesterday's economy," Hicks points out, "there is no political constituency for the future, for the firms that aren't yet born."
The sad result is that our politicians frame debates and create public policy using a model of an economy that no longer exists. Or as Tracy puts it, a model that "causes us to ask the wrong questions."
For instance, most communities' idea of economic development is to lure outside companies through tax abatements and other incentives. Yet from the standpoint of national prosperity, that's silly. It is, of course, a zero-sum affair: one community's gain is another's loss. Rather than fostering innovation and new wealth--by, say, establishing local business incubators, which research has shown are more effective on a cost-per-job-generated basis than business-attraction schemes are--communities grapple over existing wealth as if it were a fixed quantity.
The problem is compounded by the fact that the reigning economic orthodoxy--a neoclassical model known as general equilibrium theory--all but denies the existence of creative destruction. Constructed in the late 19th century and since embellished by generations of economists, equilibrium theory concerns itself mainly with how existing resources are optimized: how supply-and-demand curves determine input, output, prices, and so on. As its name suggests, the theory takes equilibrium to be the normal state of an economy, assuming that market disequilibriums are quickly eliminated through price adjustments. Its mathematically elegant universe cannot cope with entrepreneurs, relegating them to the catchall domain of "external forces," along with war and weather.
Early in this century, Joseph Schumpeter broke radically with his profession by suggesting that general equilibrium theory missed the point. It ignored what he considered capitalism's single most important aspect: innovation, which drives economic changes. "The essential point to grasp," he wrote, with a hint of contempt for his peers and their misleading mechanical metaphors, "is that in dealing with capitalism, we are dealing with an evolutionary process."
Disequilibriums were not passing anomalies, Schumpeter asserted, but rather the very crux of the capitalist process: an entrepreneurial business--Microsoft, Nucor, Southwest Airlines--enters a market with a technological or organizational innovation, destroys the oligopolistic equilibrium, and siphons off wealth and jobs from the hegemonic giants. In that model of constant disequilibrium, the entrepreneur is the central economic protagonist, the fount of economic progress and quality-of-life improvements.
