The Age of Uncreative Destruction

December 6, 2010

Economic growth is a process of death and rebirth.  On the micro level, jobs are plowed over by labor-saving inventions that promote greater product per worker.  New products and services will emerge, and the production of these will require human capital to operate.  Firms and even whole industries made obsolete by the march of time and inevitable change get replaced by more efficient uses of that labor.  The marketplace insures that only new goods and services that people crave survive.  In order to create, some destruction necessarily occurs, and with it social displacement.  The more mobile are such things as labor, capital and money, the less painful is the collateral damage.  In a well-run, open capitalist society, the social contract works because in the end better and more production and worker needs are added than subtracted.

Lately, this endless process of creative destruction has not been working as designed in many advanced economies.   The cause is not a breakdown in innovation or due to a loss of mobile factors of production.  The past generation has seen an explosion of invention, applied engineering, and entrepreneurial genius from the likes Gates, Jobs, Brin, Page, and Zuckerberg.  But here is the paradox:  whole economies are running in a lower, not higher, gear.  This juxtaposition was underscored in the December 5 broadcast of 60 Minutes.  The first segment, an interview with Federal Reserve Chairman Ben Bernanke, presented a sobering picture of a U.S. economy that will likely struggle for three, five or more years, one which could have experienced 20% or higher unemployment if policymakers had not provided aggressive stimulus and which could yet stall out unless policymakers remain vigilant against downside risks from balance sheet adjustments and other headwind forces.  The second segment of the program, an interview with Facebook’s founder, Mark Zuckerberg, paints a brave new world filled with keen corporate competition and endless possibilities of interpersonal connection and new technological capabilities.

We know that U.S. productivity continues to expand at a very impressive rate.  After observing the quantum improvement in the mid-1990s, former Fed Chairman Greenspan allowed the economy to take off.  Faster productivity ought to allow greater non-inflationary economic growth, and the costs of labor and the prices charged for goods and services do in fact continue to trend southward.  In manufacturing, U.S. productivity growth averaged 3.4% per annum from 1987 to 2009, and total non-farm business productivity went up 4.3% per annum in the eight quarters between 3Q08 and 3Q10.

But something terribly wrong happened after 1999 to the expansion of U.S. jobs and real GDP as attested in the table below.  Years later, destruction is still not getting eclipsed by ensuing creation.  Creative destruction has morphed into uncreative destruction in the aggregate.

% per annum U.S. GDP Growth U.S. Jobs Growth
1950s 4.2% 2.2%
1960s 4.3% 2.6%
1970s 3.3% 2.4%
1980s 3.1% 1.8%
1990s 3.3% 1.8%
Since Dec 1999 1.75% 0.1%


The primary reason for this paradox is not known, but some possible explanations come to mind.  The relationship may be coincidental but not causal.  Failure to keep the sequence of multilateral trade-reduction pacts moving forward had after all been bemoaned by economists predicting that such would strike a blow to global growth.  That actually has not happened.  Emerging and developing economies are performing quite dynamically.  A spurious coincidence might alternatively reflect other unrelated factors like the housing market collapse or the distracting, corrosive influence of the war on terrorism.  I keep wondering, however, if economic fragility in the midst of a golden age of applied technology might in fact be a commentary on the direction of these inventions.  The development of the steam engine, the automobile, the airplane, and antibiotics or the creation of supermarkets, a national highway system, and delivery system for plentiful and low-cost energy made life easier and more enjoyable.  Man put these useful inventions to good use. 

Can the same be said about the innovations in data processing and communications?  The gadgets promote addictive behaviors in some users and tempt others into immoral activities or ones that do not lead to a good or service consumed by somebody else.  What we call technology has a) failed to promote enough job opportunities to absorb laid-off workers and new labor force entrants and b) produced a menu of available jobs that is distinctly mismatched with the skills of workers in search of a job.  Critical fields have been affected in adverse ways.  Politics, for example, is more corruptible.  Opportunities for WikiLeaks and global terrorist networks are another result of our era’s technological inventiveness. 

In this stew of paradoxes, another that seemed to pop out from the 60 Minutes broadcast is that while the movement for which the U.S. election of 2010 will be remembered by historians fought against importing the “socialism” of Europe, it is from the private sector that a big brother-like infrastructure is being built right in front of everyone’s noses, and it is all being justified by the premise that “social” connection is the greatest need of man.  A decade or two ago, one would not have thought that in hand-held gadgets lay the path to a more meaningful, socialized life, or that the distraction of such devices on top of television are just what the doctor ordered to raise a better educated child.   I wonder too if it’s possible and dangerous for people to be exposed to too much social connection.  When society is as angry as it now claims even as amazing engineering feats are being unveiled weekly, something is not right.

Copyright 2010 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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