Friday, May 29, 2009

Wither to unlease 'Creative Destruction'?

The United States of America, the great bastion of capitalism, is having a crisis of confidence on a scale that few common Americans appreciate.

And within that crisis of confidence, a debate is emerging that will form and shape the 21st Century.

First it was President George W. Bush, now it is President Barack Obama. Both Presidents have returned America to a Keynesian economic philosophy.

What does that mean? Keynesian economics is a term that means diddly to the average American and Canadian.

John Maynard Keynes (June 5, 1883 – April 21, 1946) was a renowned economist from Britain whose many ideas on economic and political theories as well as on governments' monetary policies influenced America during the Great Depression. He advocated a government that played an active role in the lives of people regarding business, economy, etc. His ideas are the basis for the school of thought known as Keynesian economics.

Keynes spearheaded a revolution in economic thinking that overturned the older ideas which held that free markets would certainly allow full employment for all workers who agreed to lower their demands for higher wages. Shortly before the end of the Great Depression his ideas were wholeheartedly put into practice by leading Western economies. During the 1950s and 60s, the success of Keynesian economics was so resounding that almost all capitalist governments around the globe utilized its policies.

Keynes's ideas became less influential in the 1970s, after attacks from Milton Friedman and other economists who were less optimistic than Keynes about the potential for interventionist government policy to complement the free market.

The adverse economic conditions of the seventies, most especially the 1973 oil crisis and the recession that followed, unleashed a swelling tide of criticism for Keynesian Economics.

By 1979 Monetarist principles had displaced Keynes as the primary influence on Anglo-American economic policy and America saw a return to the free market principles that made it the bastion of capitalism.

'Creative Destruction' returned as a guiding force of capitalism. Officially Creative Destructions denotes a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

Creative destruction occurs when something new kills something older. A great example of this is personal computers. The industry, led by Microsoft and Intel, destroyed many mainframe computer companies and rendered them obsolete. In doing so, entrepreneurs created one of the most important inventions of this century.

But today Keynes's ideas are enjoying a revival, with Keynesian thinking being behind the plans of President Barack Obama and other global leaders to rescue America's treasury and economy.

But is that what we really need right now?

Can you imagine if the computer revolution were taking place today? The government would be scrambling to bailout IBM and other giant mainframe computer companies because they were 'integral' to the economy.

The billions thrown at the likes of IBM would keep them from failing and that would have greatly hindered the development of the home computer and the technological revolution that sprang from it.

Can you imagine a world with no internet? No home computers? Such intervention would have probably profoundly devastated its development.

And that, many fear, is what is happening now. GM, Chrysler, AIG, Bear Stearns, US Banks, Fannie Mae and Freddie Mac. The list goes on and on.

Let other car companies pick up the pieces and start anew. Let other investment bankers fill the void. Critics argue that the United States must let 'Creative Destruction' run it's natural course and allow capitalism to destroy the value of established companies that enjoyed some degree of monopoly power and allow them to fail.

This process frees up capital and labour so it can be redeployed and put to better use elsewhere.

Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography – have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs.

Should we have prevented that?

Creative destruction is a powerful economic concept and explains many of the dynamics of industrial change; the transition from a competitive to a monopolistic market, and back again.

It lies at the heart of evolutionary economics.

The problem is Creative Destruction can also hurt.

Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. And while a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.

This destruction lies at the heart of the American Capitalist Experience and is crucial to the American economy reinventing itself. The problem is American is now abandoning this philosophy as President Barack Obama and other global leaders attempt to rescue America's treasury and economy with a revival of Keynesian thinking.

Like the giant forest that catches fire and burns to the ground as part of a renewal process that sees it return stronger and greater than before... so must the economy burn down the deadwood of the economic forest. When men interfer in the regeneration of forests by preventing forest fires; the amount of debris on a forest floor gathers greater and greater until it sparks an even more ferocious blaze.

Critics fear this is what both Bush and Obama are doing with the American Economy.

The US Republican Party currently founders for renewal after the folly of George W. Bush and his abandonment of American's finest capitalistic principles.

Don't any of them realize that restoring America to it's status as the world's greatest capitalist nation is the path to both the party's, and the nation's, salvation?


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