Tag Archives: joseph schumpeter

Are recessions good?

Recessions have become more rare in recent decades, and you have to leave it to the Economist to suggest that this might be a bad thing. Well, the Economist and Joseph Schumpeter, who is my personal favorite economist.

Joseph Schumpeter, an Austrian economist, argued that they provoke “creative destruction”. Failing firms leave the market, capital decamps to more promising technologies and workers move to more productive jobs. The result is short-term pain and long-term gain. Schumpeter did not argue that politicians should deliberately engineer downturns. But nor did he think they should try to prevent them. “Depressions are not simply evils, which we might attempt to suppress,” he wrote. They represent “something which has to be done”.

In my many grade-school years of American history (which seemed to be the only kind of history I ever got, unless you count that one year of Virginia history I had to take), I remember my eyes glazing over when hearing about “the panic of 18XX”. Where “XX” represents pretty much any odd numbered year during that century. It just seemed to be a wild and woolly time with no central banks, regulation, or consumer protections. Lots of people got rich, and lots of people lived in what we used to call “third world” conditions.

It makes sense to me that businesses should not be overly insulated from the consequences of the risks they take, while ordinary people mostly should. So this points to not a lot of bailouts for inefficient industries, coupled with robust social insurance like unemployment and disability. In the U.S. though, what I see is big business capturing the government and successfully insulating itself from the consequences of risk taking, which suppresses competition and Schumpeter-esque innovation. We do sort of seem to get the unemployment thing right though, when push comes to shove, which worked out pretty well during the pandemic. People who were employed when the pandemic hit seemed to do okay. People who were not employed fell through the cracks of course, as they tend to do in our system. And if they turned to drug or alcohol abuse, they fell even further due to our lack of universal health care.

So my quasi-libertarian prescription here, which I think Schumpeter and even Hayek might approve of, is to let the companies compete and innovate, or die. Let them hire and fire at will. But workers need to be protected by robust unemployment, disability, health care and child care programs. The government needs to raise and then redistribute revenue to do this, but everybody comes out ahead in the aggregate except a few fat cats at the top who would rather use their wealth and power to rig the system in their favor than have to compete and innovate. Recessions are also the time to double down on infrastructure, research and development, education and training funding which underpin long-term productivity growth and innovation of an advanced economy. I think Schumpeter’s ghost would love that!

monopoly and free markets

This article from Alternet has a nice explanation of why “free markets” in the absence of regulation do not lead to open and fair competition:

Some monopolistic industries mess around with your daily life in an obvious way, like Big Telecom bringing you the low-grade misery of shoddy service and defective products. Others fly a bit lower under the radar, like the credit reporting monopolist Fair Isaac Corp, which can blast your financial existence in a nanosecond…

What I want to see, when I look at a marketplace is: Is that market open to a newcomer?

If I want to go into the business of farming in this community, can I become an independent farmer? If I want to go into the grocery business, can I do that, is it open? If I want to bring a new variety of paint to the market, do I have a place to sell my new variety of paint? If markets are open, that’s a good thing.

What we see is that the people who have actually preached the doctrine of free markets, this last generation, when you go back and look at it historically, is that the idea of free markets really comes out of the Chicago School, the libertarian wing of academia. They were preaching free markets, but when they would preach free markets, they also preached the elimination of all regulation. But when you eliminate all regulation you end up with no markets at all, because you end up with monopolists, and monopolists are the antithesis of an open market.

This idea of markets truly open to new competitors makes a lot of sense, and it makes sense for the government to support it. However, going back to Joseph Schumpeter and his idea of “creative destruction”, there is another kind of competition that may be more important. Competition is not just about new competitors entering the market to provide the exact same good or service in the exact same way. It is also about innovators finding completely new ways to satisfy people. For example, instead of competing with existing car companies by offering a different brand of car, I can compete by inventing Uber, or a car pooling website, or bike share, or protected bicycle lanes. These are alternative ways of meeting peoples’ need and desire to get from point A to point B. Even if the car company has a monopoly on the market for cars and it is hard to enter that market, we can compete with them. In fact, if they are slow to innovate and respond to outside threats, we may be able to crush them.

This model sounds great, but there is something insidious that often happens. The monopolist, instead of responding with innovations of its own, buys political power and uses it to try to prevent others from innovating. You can see this in the fight against Uber, and Airbnb, and selling solar power back to the grid. This is what I find really shameful and undemocratic, and we good citizens should not let it stand.