CREATIVE DESTRUCTION

Ken O’Brien

For forty years I have waited for the term “creative destruction” to enter the American political lexicon.

More than any other concept, this idea, first popularized in its contemporary form by the Austrian economist Joseph Schumpeter, clarifies the proper contemporary framework for government fiscal policies and intervention in the economy.

It is ironic that it has been raised as an issue by the Republican frontrunner for the Presidential nomination Mitt Romney.

The irony lies in the fact that someone posturing as a small government, free market conservative should advance a concept that, in the final analysis, provides the best justification for Progressive policies of government involvement in the economy and the existence of social safety nets.

“Creative destruction” addresses the historical tendency for new industries to supplant and gain dominance over an earlier pattern of production.

More than anything else, it explains the role of technological change as a dynamic mechanism in the evolution of society and the economic underpinnings of that society.

Its significance in the current landscape of politics and economics arises from the fact that over the last seventy five years the rate of technological change has accelerated at a pace unknown to prior generations.

However, economic theory has failed to incorporate in any meaningful way the phenomenon of technological change. Consequently, there has not emerged a philosophy of political economy that offers an integrated approach to policy formulation to deal with this more aggressively changing landscape.

Whereas our grandparents and their forebears grew up in a world where the technologies underlying the economy changed slowly over several generations, even during the dramatic upheavals of the industrial revolution, we now live in a world where technologies arise and supplant existing industries and business models in decades.

The consequences are massive. Foremost is the rate at which human capital becomes obsolescent. Skills gained in the first two and a half decades of one’s life are being supplanted as they enter the fourth and fifth decade of their life.

The same is true of our stock of capital investment. Investors are demanding rates of return on investment out of proportion to anything in previous history. This results from the fact that invested capital must be capable of disinvestment more quickly than in prior generations for reinvestment in newer and more rapidly growing technologies.

Both phenomena have brought to loggerheads conflicting interests that are at the core of the current polarization not only in American politics, but throughout western democracies.

As regards the issue of human capital, we see it in the conflict between labor interests and proponents of economic efficiency.

In capital allocation we see it in the conflict between powerful interests that seek to perpetuate outdated technologies through social subsidization against emergent technologies that would supplant them. This is nowhere more pronounced than in the bedrock technology of carbon-based energy versus renewables.

In either case, or numerous others that can be cited, what is needed is a paradigm of social mediation that reconciles the needs for economic advancement and growth with the dynamics of the human life cycle.

As a starting point I would advocate a change in one of the most fundamental premises of contemporary economics.

That change would be to view information as a factor of production along with the traditional elements of land, labor and capital. Just as the traditional factors of production undergo transformative processes that result in economic value, so information is translated into knowledge which is subsequently applied to create technology.

Inherent in such a formulation is a realization that virtually all members of society contribute in some way to the production of information – whether it is as profound as a new scientific discovery or as mundane as indicating a preference that is basic to the growth of a consumer-based society.

The challenge is to realize that “creative destruction” is a phenomenon of reality, not an ideological position. In order to deal with it requires a collaborative approach between government and business, not an adversarial one.

Unfortunately, prior policies and entrenched interests stand in the way of such a pragmatic approach.