For a
time, Joseph Shumpeter’s idea of creative destruction was all
the rage in business meetings across the country. I'm not sure if it still is
these days, as I haven't been in one in a decade at least, but maybe now is an
appropriate time to reconsider the phrase, particularly as Obama is rumored to
be considering Larry Summers as the next chair of the Federal Reserve. I'll get
there in a second, but let's considers Summers as a choice for a moment. He is
the same man that caused many famous academics to leave Harvard during his
tenure, including Cornell West, based on his bullying, overbearing nature and
disrespect for anyone who doesn’t cow tow before his clearly superior intellect.
He is the same man that sanctioned the open debate of whether women were simply
less genetically-suited for math and science. He is the same man who is crass
and has a tendency to alienated those around you. However, maybe all of these
could be forgiven if he were not one of the key architects of implementing
neoliberalism under Clinton. Summers is a guy who continues to believe in the
unfettered free market and the rather tired assumption that global trade will
lift all boats. And even as the most brilliant men in many rooms, he also has a
long history of getting the big decisions wrong.
On to creative destruction, the popular notion that the new destroying the old is one of the key drivers of capitalism and technological innovation. While it is hard to argue that this is not often the case, it is based on an assumption that might fail under closer scrutiny -- namely that what is creative and new is implicitly superior to what it replaces. The examples are endless, particularly from a technological standpoint, but here I want to focus on Wall Street and, more briefly, on Washington DC. Wall Street was the engine of the most recent financial collapse and this largely resulted from people like Larry Summers advising us to stay away from regulating banking activities, even something as dangerous as the increasingly complex derivatives that were being developed in the late 90s. The new Wall Street at the turn of the century had largely decided to abrogate any responsibility to manage economic and market risk (one of their two primary goals together with providing investment funds for new ideas and expansion). Instead the new brands of Wall Street analyst and Trader were engaged in increasingly risky behavior that reaped huge benefits for themselves and their firms, but often did little to actually help the economy. The creative destruction here was of Wall Street's essential role in evaluating a company’s health, the prospects of going public, expansion (through investment), mergers and the general health of the economy. It was also creative destruction of their role in placing available funds into investment opportunities with the highest potential returns, controlling for the risks. Wall Street had replaced these two roles with going after the biggest opportunity for internal profit without sufficient fear or understanding of the risk and too often investing in instruments, markets and stocks that provided no additional value or growth to the economy. This was perhaps best demonstrated by the fact that bonuses for the few investment banks left standing in 2008 were the highest in history (and the next year even higher still).
Creative destruction only works if what replaces the old is better. And it appears that too often that is not the case, at least if we move beyond the bottom line to petty things like economic growth, poverty, unemployment rates and other measures of quality of life. This also appears to sum up what has happened in Washington DC since at least the 80s, though it started much earlier. Corporations, whose profits fell throughout the 70s, became the main pushers of the conservative revolution and the first hints of the neoliberalism to come. To facilitate their more active role in undermining government, they set up the biggest and most successful lobbying establishment in the world (though some other countries like Italy just bow to corruption more openly and readily). Business interests not only pushed their particular interests, but the overall interests of corporations and their boards in America -- including deregulation, lower marginal tax rates on individuals, capital and corporations themselves, anti-labor laws, a transfer of responsibility for retirement and health care to their workers (at least partially), freeing of markets (interior and exterior), shrinking of government services and expenditures, scaling back of environmental and job safety regulation and lowering of barrier to trade. In this case the creative destruction was of the established social contract of rights and obligations for citizens within a democracy. This was replaced with a veritable Plutocracy with citizens rebranded as consumers. Maybe it's time to creatively destroy creative destruction, eh?
On to creative destruction, the popular notion that the new destroying the old is one of the key drivers of capitalism and technological innovation. While it is hard to argue that this is not often the case, it is based on an assumption that might fail under closer scrutiny -- namely that what is creative and new is implicitly superior to what it replaces. The examples are endless, particularly from a technological standpoint, but here I want to focus on Wall Street and, more briefly, on Washington DC. Wall Street was the engine of the most recent financial collapse and this largely resulted from people like Larry Summers advising us to stay away from regulating banking activities, even something as dangerous as the increasingly complex derivatives that were being developed in the late 90s. The new Wall Street at the turn of the century had largely decided to abrogate any responsibility to manage economic and market risk (one of their two primary goals together with providing investment funds for new ideas and expansion). Instead the new brands of Wall Street analyst and Trader were engaged in increasingly risky behavior that reaped huge benefits for themselves and their firms, but often did little to actually help the economy. The creative destruction here was of Wall Street's essential role in evaluating a company’s health, the prospects of going public, expansion (through investment), mergers and the general health of the economy. It was also creative destruction of their role in placing available funds into investment opportunities with the highest potential returns, controlling for the risks. Wall Street had replaced these two roles with going after the biggest opportunity for internal profit without sufficient fear or understanding of the risk and too often investing in instruments, markets and stocks that provided no additional value or growth to the economy. This was perhaps best demonstrated by the fact that bonuses for the few investment banks left standing in 2008 were the highest in history (and the next year even higher still).
Creative destruction only works if what replaces the old is better. And it appears that too often that is not the case, at least if we move beyond the bottom line to petty things like economic growth, poverty, unemployment rates and other measures of quality of life. This also appears to sum up what has happened in Washington DC since at least the 80s, though it started much earlier. Corporations, whose profits fell throughout the 70s, became the main pushers of the conservative revolution and the first hints of the neoliberalism to come. To facilitate their more active role in undermining government, they set up the biggest and most successful lobbying establishment in the world (though some other countries like Italy just bow to corruption more openly and readily). Business interests not only pushed their particular interests, but the overall interests of corporations and their boards in America -- including deregulation, lower marginal tax rates on individuals, capital and corporations themselves, anti-labor laws, a transfer of responsibility for retirement and health care to their workers (at least partially), freeing of markets (interior and exterior), shrinking of government services and expenditures, scaling back of environmental and job safety regulation and lowering of barrier to trade. In this case the creative destruction was of the established social contract of rights and obligations for citizens within a democracy. This was replaced with a veritable Plutocracy with citizens rebranded as consumers. Maybe it's time to creatively destroy creative destruction, eh?
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