Two Models, One Economy
Schumpeter's perspective did not fare well, mostly because it did not lend itself easily to mathematical expression. Strangely, he was remembered more for a fantastically incorrect prediction--that huge corporations would come to dominate the U.S. economy--than for his central thesis of creative destruction. Today a small tribe of maverick economists--particularly Paul Romer of Stanford University--has resuscitated Schumpeter's vision, contending that it offers an altogether more accurate description of how today's economy actually works. Yet, as Richard Nelson of Columbia University remarks, "there is scarcely a crowd of us."
Ongoing resistance to a more dynamic conception of capitalism has unfortunate policy consequences. For example, there's great self-congratulation in America about "our efficient financial markets," says Bruce Kirchhoff of the New Jersey Institute of Technology. But "from the small company's point of view," he says, "they're anything but efficient. The transaction costs are huge. The deal flow is horrible." If there were a more thorough comprehension of the macroeconomics of small enterprises, Kirchhoff argues, the government wouldn't have waited so long to allow a public market for entrepreneurs looking for equity capital, which the Securities and Exchange Commission only recently OK'd.
Or take the government's data-gathering efforts. As Kirchhoff points out, they're designed under the faulty notion that an insignificant number of small companies grow to become large ones. The resulting methodology makes it difficult to determine such basics as how many new jobs entrepreneurial companies contribute to the economy. That, in turn, leaves policymakers in a data vacuum when fashioning economic policy. "What we're trying to do is sell the American political system on a new view of what the economy is, and to sell it we need good data," says Kirchhoff. "But there is no data."
In the absence of firm numbers and understanding, the American mind falls prey to the crooning of narrative economists. These are commentators who, instead of arriving at informed judgments through assiduous empirical analysis, construct story-line interpretations largely out of anecdote and aphorism. Case in point: the New York Times noticed that a lot of people were being downsized from corporations and reacted by running an interminable, near-hysterical series in March 1996 informing us that we're living through an economic cataclysm of millennial proportions.
That story line, the sensible among us recognized, was simply not true. The data told us so: the combined rate of unemployment and inflation--a pretty good indicator of citizens' economic well-being--was at a 30-year low. Job creation was at a historic high. Presented with that stubborn evidence, the narrative economists came up with a new fable that seemed to trump it, the oft-repeated joke that the economy produced record numbers of new jobs last year, "and I've got three of them." In time, however, that myth was punctured, too: the president's Council of Economic Advisers reported that the new jobs being created were relatively high-paying and overwhelmingly full-time.
Why the Times series, then? It was a classic instance of viewing a current phenomenon through an outmoded lens. Through the lens of general equilibrium theory, the mass dislocation of thousands of workers would, indeed, signal that something was dreadfully awry. Through a Schumpeterian lens, on the other hand, it was a sign of something else--something that could best be described as economic speed. In the so-called new economy, companies and even entire industries can swiftly rise and fall as resources are transferred to more fruitful sectors (as, in a healthy economy, they should be). What's confusing is that a phenomenon that has long been solely associated with economic downturns--massive layoffs--has now become a permanent fixture in the economy.
That is not to suggest that layoffs don't inflict a severe personal toll; certainly they are painful, depressing, even shattering to the people at their receiving end. (And depending on your view of government, there may be a role for the state to play in easing these transitions through job retraining and other programs.) But the story of thousands losing their jobs at a no-longer-competitive industry giant cannot rightly be generalized into an allegory for the state of the U.S. economy. Is this new economy more uncertain and perhaps a little crueler than its predecessor? Of course. But is it less prosperous? Does it offer fewer opportunities? Quite the opposite.
When it comes to the two components of creative destruction, though, the destruction part generally makes for the more dramatic, compelling narrative. The creation part can fall a tad short on story value ("Silicon Valley Start-up Hires 50!"). "Both economists and popular writers have once more run away with some fragments of reality they happened to grasp," Schumpeter complained a half century ago. He'd undoubtedly raise the same objection today.
The Fallout from Getting It Wrong
When these spurious interpretations march victorious, we end up with loony legislative prescriptions. In this past election year, they emanated from politicians of all stripes. Republican presidential candidate Pat Buchanan, blaming foreign competition for all America's woes, demanded protection for dying industries--a surefire recipe for stunting domestic entrepreneurship and securing economic mediocrity. Then labor secretary Robert Reich (narrative economist extraordinaire) demanded tax breaks for companies that refrain from layoffs--another wonderful means of distorting the economy by attacking a symptom rather than the root problem.
Popular debate is largely a contest of interpretations, and without an informed explanation of what's actually driving our economy, these muddled, misconceived story lines advance unchecked.
